Peninsula Nephrology v. Claremont Liability Ins.

Filed 10/23/08 Peninsula Nephrology v. Claremont Liability Ins. CA1/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION ONE

In a prior action, plaintiff Peninsula Nephrology, Inc. (Peninsula) sued a general contractor covered by insurance policies issued by two insurers. One of the insurers provided a defense, but the other, defendant Claremont Liability Insurance Company (Claremont), refused to participate. The litigation was ultimately settled and a stipulated judgment was entered that was, by agreement, nonrecourse to the defendants.[1] Actual payments by the defendants covered only about half of the total judgment amount.

Peninsula then filed this action to compel Claremont to pay the unpaid portion of the judgment. After a bench trial, the court concluded that Peninsulas actual damages were considerably less than the amount of the judgment and refused to compel payment from Claremont. Peninsula subsequently moved pursuant to Code of Civil Procedure[2] section 663 to vacate the judgment, contending that the trial court erred in requiring it to prove that the judgment was reasonable in amount. The trial court denied the motion, and we affirm.

I. BACKGROUND

On March 7, 2005, Peninsula filed an action against Claremont alleging causes of action for recovery on a judgment pursuant to Insurance Code section 11580, insurance bad faith, and contribution. The allegations of the complaint, which appear to be largely undisputed, stated that Peninsula had contracted with Net Development Company (Net), a general contractor, for the construction of a dialysis center in San Mateo in 1997. The building was completed the following year. Dissatisfied with the result, Peninsula sued Net and other entities, seeking more than $6 million in damages.

Net held general commercial insurance policies issued by Ranger Insurance Company (Ranger), effective from August 1997 to August 2000, and Claremont, effective beginning in August 2000. Net tendered defense of Peninsulas lawsuit to Ranger and Claremont. Ranger accepted the tender, but Claremont did not. The matter was assigned to a special master, who conducted an extensive series of mediation sessions, numbering at least 15. Claremont did not participate in these efforts. The parties reached settlement in October 2003, reduced their agreement to writing, and stipulated to entry of a judgment.

Under the terms of the settlement, which was not subjected to court evaluation under section 877.6, Net stipulated to a total judgment of $6 million, with an agreed setoff of $3.65 million. Net agreed to pay Peninsula $1.2 million, with a variety of other parties, apparently subcontractors, paying the remainder of the $3.65 million setoff amount. Despite the large difference between the total judgment and the actual payments, the settlement agreement stated that Peninsula would not execute on the judgment in any fashion except to the extent [it] can recover under any insurance policy issued to [Net] by [Claremont]. To facilitate this recovery, Net assigned to Peninsula all of its claims for indemnity against Claremont, and Ranger assigned to Peninsula its claims against Claremont for contribution for attorney fees and costs incurred in defending the litigation. The present lawsuit seeks to recover under these assigned claims for the balance of the judgment against Net, as well as bad faith damages and reimbursement for a share of Rangers defense costs.

The matter was tried to the court in April 2006. Following the presentation of Peninsulas case, Claremont moved for entry of judgment pursuant to section 631.8. The trial court granted the motion in a detailed statement of decision. The court held that Peninsula was required, under Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500 (Pruyn), to demonstrate that Claremont wrongfully refused to provide coverage, that its insured thereafter settled, and that the settlement was reasonable in the sense that it reflected an informed good faith effort by the insured to resolve the claim. While the court concluded that Peninsula had made a prima facie case of wrongful refusal of coverage and settlement, it held that Peninsula failed to demonstrate that the settlement was reasonable. Although several witnesses testified that they believed Peninsulas damages exceeded $6 million, the trial court found no evidence to support these beliefs. Instead, when the court summarized the evidence of damages presented by [Peninsula] which were not purely opinion or conclusion testimony, it found that confirmed damages totaled approximately $3.8 million, even though the court accepted the high end of any and all estimates and figures. Because Peninsulas settlement far exceeded its actual damages, the court held that it had failed to demonstrate that the settlement was reasonable. The court therefore entered judgment for Claremont on the causes of action for payment of a judgment under Insurance Code section 11580, subdivision (b)(2) and bad faith. A judgment was later entered reflecting these rulings, as well as a money judgment in favor of Peninsula on the cause of action for contribution.[3]

Peninsula thereafter moved to vacate the judgment regarding the first two causes of action under section 663. Peninsula argued that under Pruyn and Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501 (Xebec) (disapproved on other grounds in Essex Ins. Co. v. Five Star Dye House, Inc. (2006) 38 Cal.4th 1252, 1265, fn. 4), it should have been afforded a presumption that the settlement with Net was reasonable solely on the basis of its demonstration that the settlement was reached through a reasonable process. Upon that showing, Peninsula argued, the burden should have shifted to Claremont to demonstrate that the settlement was unreasonable.

The trial court denied the motion. In a written tentative ruling, the court noted, The mediation process leading to settlement in the underlying case here . . . . did not constitute an independent adjudication of facts based on an evidentiary showing. [Citation.] Accordingly, the Court correctly required Plaintiff to present such an evidentiary showing that it had indeed sustained damages sufficient to justify a $6 million settlement at the time of trial. [Citation.] Furthermore, even if the Court erred in denying Plaintiff the benefit of the evidentiary presumption . . . the evidence in the existing record is more than sufficient to meet [Claremonts] burden [to show that the settlement was unreasonable]. Accordingly, either way, the existing judgment in Defendants favor on the first and second causes of action of the complaint is proper . . . .

II. DISCUSSION

Peninsula appeals from the order denying its section 663 motion, again arguing that it was entitled to a presumption that the settlement was reasonable because it demonstrated that the settlement process by which the parties settled the underlying action was reasonable.[4]

As an initial matter, Claremont responds that the trial courts order denying the section 663 motion cannot be appealed separately from the judgment and that Peninsulas appeal was untimely as to the judgment itself.

As noted in City of Los Angeles v. Glair (2007) 153 Cal.App.4th 813 (Glair), confusion surrounds the issue of the appealability of section 663 orders. (Id. at p. 822.) Prior to Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865 (Clemmer), a long line of cases had held that the denial of a motion to vacate a judgment under section 663 can be appealed separately from the underlying judgment. (Howard v. Lufkin (1988) 206 Cal.App.3d 297, 301 (Howard).) In Clemmer, the Supreme Court held that such orders are not separately appealable, but it did so without expressly overruling, or even acknowledging, the prior case law. In Howard, Division Three of this court held that Clemmers pronouncement was dictum and adhered to the longstanding rule permitting separate appeal. Glair held the oppositethat orders disposing of motions under section 663 are not separately appealableboth because it considered itself bound by Clemmer and for underlying reasons of policy. (Glair, at pp. 821822.) Unless and until the issue is finally resolved by the Supreme Court, we elect to follow the long-standing rule, for the reasons stated in Howard. (Howard, at pp. 301302.) We therefore consider Peninsulas appeal of the section 663 ruling on its merits.

Peninsulas fundamental argument is that Pruyn does not require Peninsula to prove the amount of the settlement with Claremonts abandoned insured was reasonable. Rather, Peninsula argues, it was entitled to a presumption that the settlement was reasonable upon submitting proof that the parties in the underlying litigation followed a good faith settlement process. We find nothing in either the governing case law or policy to support this argument.

As Peninsula argues, Xebec and Pruyn are the two cases most pertinent here. Xebec presented a situation materially identical to this one. A third party corporation had taken out a directors and officers insurance policy from the defendant insurer. (Xebec, supra, 12 Cal.App.4th at p. 515.) The corporation was eventually sued by the plaintiff, and after extensive litigation the parties arrived at a settlement. (Id. at p. 523.) The covered officers agreed to a settlement of $9 million, which was nonrecourse as to them; the settlement was entered as an arbitration award and confirmed by the court; and the third party corporations rights against the insurer were assigned to the plaintiff. (Id. at pp. 523, 540.) The plaintiff then sued the insurer to collect on the arbitration award reached through the settlement negotiations, prevailing after a jury trial.

In reviewing the judgment, the court observed that the settlement will not inevitably fix the amount the insured can recover but will instead give rise only to a presumption as to the fact and amount of injury to the insured: In a later action against the insurer for reimbursement based on a breach of its contractual duty to defend the action, a reasonable settlement made by the insured to terminate the underlying claim against him may be used as presumptive evidence of the insureds liability on the underlying claim, and the amount of such liability. [Citations.]  (Xebec, supra, 12 Cal.App.4th at pp. 544545, quoting Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 791792.) In order to earn the presumption, a plaintiff is required to prove the basic or foundational facts that the settlement (1) was occasioned by a breach of the insurance contract by [the insurer], (2) was valid with respect to [the insurer], and (3) was reasonable in the sense that it reflected an informed and good faith effort by the settling parties to reconcile their presumably differing views as to the relative strengths of their respective claims and defenses. (Xebec, at p. 545.) If the plaintiff makes this prima facie case, the burden shifts to the insurer to demonstrate that the settlement did not accurately reflect the existence or amount of the insureds liability. (Id. at p. 549.)

In explaining the concept of a reasonable settlement, the court held that an insured must have informed himself or herself adequately as to the nature and viability of the third partys claims against him or her, may reasonably settle only if it will be to his or her personal advantage to do so, may not reasonably settle for more than the reasonably predictable cost of defending the action and paying the amount of the claim discounted by any reasonable likelihood that the third party will not prevail, and must in any event make good faith efforts to achieve the bestwhich is to say the least expensivesettlement possible in light of the circumstances known to the insured at that time. (Xebec, supra, 12 Cal.App.4th at pp. 554555.)

In responding to the defendant insurers argument that the settlement should have been found unreasonable for various reasons, the court acknowledged that the evidence would unquestionably justify findings that the . . . settlement figure . . . did not reasonably reflect either the fact or the amount of any liability [the insureds] might have had as individuals. In this sense the evidence would have supported a conclusion that the settlement . . . was not reasonable from the perspective of [the] insureds. (Xebec, supra, 12 Cal.App.4th at p. 555.) The court did not overturn the jury verdict on this ground, however, because the plaintiff produced evidence sufficient to support a finding of reasonableness and thus to pose an issue of fact for the jury to resolve one way or the other. (Id. at p. 556.)

As the foregoing discussion makes clear, to prove that a settlement was reasonable under Xebec, the plaintiff is required to show more than that the parties engaged in good faith negotiations. Rather, the plaintiff is required to show that the settlement was substantively reasonable: that is, that the amount of the settlement did not exceed the reasonably predictable cost of defending the action and paying the amount of the claim discounted by any reasonable likelihood that the third party will not prevail. (Xebec, supra, 12 Cal.App.4th at p. 555.) Indeed, without even discussing the settlement process, the Xebec court noted that the jury could have found the settlement unreasonable because it did not reasonably reflect either the fact or the amount of any liability [the insureds] might have had as individuals. (Ibid.) There is no support for Peninsulas position in Xebec; on the contrary, the decision wholly supports the trial courts approach.

The second pertinent case, Pruyn, leads to a similar conclusion. In Pruyn, the plaintiff sued a homeowners association. After the associations insurer refused to provide a defense, the association settled with the plaintiff for $650,000, was granted a covenant not to execute, and assigned its rights against its insurer to the plaintiff. (Pruyn, supra, 36 Cal.App.4th at pp. 510511.) The parties moved for, and were granted, a declaration that the settlement was made in good faith under section 877.6. (Pruyn, at p. 512.) When the plaintiff sued the insurer to recover the settlement amount, the insurer successfully resisted under a so-called  no action  clause in the policy. (Id. at pp. 512513.) In overturning the trial courts grant of demurrer, the court of appeal held that the  no action  clause did not prevent the plaintiff from pursuing recovery. It further held that, while the section 877.6 adjudication did not bind the insurer, it was sufficient to carry the plaintiffs prima facie burden of demonstrating that the settlement was reasonable, and therefore was entitled to the presumption discussed in Xebec. (Pruyn, at p. 529.)

In reaching that conclusion, the court discussed the demonstration required of a plaintiff to take advantage of the evidentiary presumption. Like Xebec, Pruyn listed a series of three foundational facts that the plaintiff was required to demonstrate, although the phrasing of these facts differed somewhat from those listed in Xebec. The two courts appeared to agree, however, on the substance of the third factor. Pruyn held that the plaintiff was required to demonstrate that the settlement was reasonable in the sense that it reflected an informed and good faith effort by the insured to resolve the claim (Pruyn, supra, 36 Cal.App.4th at p. 528), which appears to be an abbreviated statement of Xebecs requirement that the settlement be reasonable in the sense that it reflected an informed and good faith effort by the settling parties to reconcile their presumably differing views as to the relative strengths of their respective claims and defenses. (Xebec, supra, 12 Cal.App.4th at p. 545.)

In discussing the meaning of reasonable in this context, the Pruyn court noted, The insured can satisfy its prima facie burden of showing that the settlement was reasonable by presenting the same kind of evidence which would support a determination of good faith under section 877.6. Good faith, for purposes of section 877.6 requires the trial court to inquire, among other things, whether the amount of the settlement is within the reasonable range of the settling tortfeasors proportional share of comparative liability for the plaintiffs injuries. . . . [] . . . [T]he intent and policies underlying section 877.6 require that a number of factors be taken into account including a rough approximation of plaintiffs total recovery and the settlors proportionate liability, the amount paid in settlement, the allocation of settlement proceeds among plaintiffs, and a recognition that a settlor should pay less in settlement than he would if he were found liable after a trial. Other relevant considerations include the financial conditions and insurance policy limits of settling defendants, as well as the existence of collusion, fraud, or tortious conduct aimed to injure the interests of nonsettling defendants. [Citation.] (Pruyn, supra, 36 Cal.App.4th at pp. 528529.) In other words, Pruyn also required a plaintiff to demonstrate that the settlement was substantively reasonable.

Peninsulas argument that it was merely required to show that it engaged in a good faith settlement process in order to earn the presumption appears to be based entirely on its interpretation of the language chosen by Pruyn to describe the third factor, that the settlement was reasonable in the sense that it reflected an informed and good faith effort by the insured to resolve the claim. (Pruyn, supra, 36 Cal.App.4th at p. 528.) According to Peninsula, the phrase an informed and good faith effort should be interpreted to refer to the process, rather than the substance, of the settlement. As noted, the language used by Pruyn appears to be merely a shorthand version of the language of Xebec:that the settlement was reasonable in the sense that it reflected an informed and good faith effort by the settling parties to reconcile their presumably differing views as to the relative strengths of their respective claims and defenses. (Xebec, supra, 12 Cal.App.4th at p. 545.) In other words, Pruyns phrase is merely a summary of the Xebec holding that a settlement must be demonstrated to be substantively reasonable.

Putting this aside and assuming, for the sake of argument, that Peninsulas proposal constitutes a reasonable interpretation, in isolation, of the words chosen by Pruyn, the phrase cannot be interpreted outside the context of the remainder of the decision. The decision, as discussed above, makes clear that Pruyn anticipated that an informed and good faith effort would be proved through a demonstration that the substance of the settlement was reasonable. Particularly in light of the courts reference to section 877.6, there is no basis for construing the language of the decision in any other way.[5]

The settlement here, the result of an extended and apparently good faith settlement process, illustrates why the settlement process alone is an insufficient basis for presuming that the resulting settlement is a fair representation of the insureds liability. Unlike the plaintiff in Pruyn, Peninsula did not obtain a good faith certification under section 877.6. The only information provided to the trial court about the process of settlement was that the parties met no less than 15 times, under the guidance of a mediator, to settle their differences. As is clear from the settlement agreement, the settlement discussions involved several different parties, all of whom agreed ultimately to make actual payments to Peninsula. In the absence of additional information about the process, the natural assumption is that the bulk of the 15 settlement sessions were consumed with a discussion of how much would be paid by those parties and how the payment would be divided between them. Negotiation of the amount of the settlement that none of the participants would be required to paythe portion of the settlement that Peninsula seeks to enforce herepresumably did not detain the parties for long, since none of them, other than Peninsula, would be affected by it. It is therefore immaterial that the overall settlement process was lengthy.

As noted in Pruyn, a stipulated or consent judgment which is coupled with a covenant not to execute against the insured 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 insureds 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.  (Pruyn, supra, 36 Cal.App.4th at p. 518.) While the issue of fraud or collusion was not raised here, the trial court concluded that, as one would expect, the complete absence of any incentive among the participants to minimize the portion of the settlement that they would not be required to pay led to an inflated figure unjustified by Peninsulas actual losses. Because the process provided no assurance of fairness to the absent insurer, the only way to ensure that the settlement was entitled to a presumption of accuracy was to examine the merits of the settlement itself.

Accordingly, there was no legal error in the trial courts requiring Peninsula to demonstrate that the settlement was substantively reasonable before affording it the benefit of the presumption that the settlement was an accurate measure of Nets liability. The section 663 motion was therefore properly denied.

III. DISPOSITION

The judgment of the trial court is affirmed.

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Margulies, J.

We concur:

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Marchiano, P.J.

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Swager, J.

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[1] Although the judgment had been entered against all of the defendants in the underlying litigation, Peninsula agreed in the settlement agreement that it would not execute on the judgment in any fashion except as against Claremont. The judgment was therefore unenforceable against the defendants.

[2] All further statutory references are to the Code of Civil Procedure unless otherwise indicated.

[3] Claremont states that the trial court entered a second statement of decision regarding this contribution cause of action, but there is no such statement of decision in the record. Because the judgment on this cause of action is not at issue on this appeal, we do not concern ourselves with this decision.

[4] Because Peninsulas motion was made under section 663, on the grounds that there was an incorrect or erroneous legal basis for the decision (id., subd. (1)), our review is strictly limited to the legal issue raised by Peninsula in its motion below. (Moklofsky v. Moklofsky (1947) 79 Cal.App.2d 259, 264.) We do not review the validity of the trial courts factual finding that the settlement amount exceeded Peninsulas provable damages.

[5] In its reply brief, Peninsula attempts to shift its legal argument to the contention that the settlement reached by the parties . . . is relevant evidence of an informed and good faith effort by the insured to resolve the case. While this is certainly a more tenable argument, it would not have justified vacating the judgment. Assuming the settlement was merely evidence of reasonableness, the trial court would not have committed legal error in considering the substance of the settlement as well. Peninsulas reply brief further argues that [t]he record contains substantial uncontroverted evidence that the settlement reflected Nets informed and good faith effort to resolve Peninsulas claims. This apparent challenge to the trial courts factual findings was not made below and is improper on a motion under section 663. We disregard both new arguments.