By: Patrick A. Calhoon
Your client was seriously injured in a car accident. He has damages that undisputedly approach several million dollars. You sue the at-fault driver who has a $100,000 policy, and two other smaller policies for $25,000 with questionable coverage. The insurer provides a defense to the at-fault driver and offers your client $100,000 to settle. You reject the offer because you believe there is coverage under the other two policies. You make a time-limit demand for the full $150,000. The offer is not accepted within the proscribed time-limit. A little later, the insurer offers the full $150,000 under all three policies. Ha! Too late. The insurer exposed its insured to an excess judgment; that’s bad faith you think. So, you hatch a plan. Step one: Serve the at-fault driver with a section 998 offer to compromise for your client’s full damages of $3 million. Step two: Get the at-fault driver to stipulate to judgment in your favor for the $3 million section 998 offer and agree to not execute on the judgment in exchange for an assignment of the bad faith case. Step three: File a bad faith case as the assignee seeking the $3 million stipulated judgment as damages. Seems legit, right?
Wrong. This past September the California Court of Appeal issued its decision in 21st Century Ins. Co. v. Superior Court, 240 Cal.App.4th 322 (2015) (“21st Century”). 21st Century provides several reasons why, under facts similar to the above, stipulated judgments should be used with extreme caution. The opinion is also noteworthy because it went to extraordinary lengths to distinguish Risely v. Interins. Exch.of the Auto Club, 183 Cal. App. 4th 196 (2010)(“Risely”), which is regularly used as a roadmap for insureds and third party claimants seeking to enter into valid assignments. One can speculate that 21st Century is an effort by the court to curb manufactured “excess” liability against insurers arising from stipulated judgments.
Factual Background of 21st Century
Cy Tapia was a teenager living with his aunt and grandmother when he had a serious auto accident, inflicting severe and eventually fatal injuries on his passenger, Cory Driscoll.
Before his death Driscoll and his mother filed an action for personal injury and wrongful death. The parties soon established that the vehicle driven by Tapia was owned by his grandfather and that Tapia was entitled to $100,000 in liability coverage under an auto policy issued to Melissa McGuire (Tapia’s sister), which listed the vehicle as an insured vehicle and listed Tapia as the driver of the vehicle. This policy was issued by 21st Century Insurance Company. Accordingly, 21st Century offered to settle the action for the policy limits of the McGuire policy—that is, $100,000.
However, plaintiff’s counsel also believed that Tapia might be covered under policies issued to his aunt and grandmother, each offering $25,000 in coverage and also issued by 21st Century. Therefore, Driscoll’s counsel communicated an offer to settle for $150,000 to Tapia’s counsel. 21st Century contends that it never received this offer—that is, that Tapia’s counsel did not inform it of the offer—although there was certainly evidence to the contrary. In any event, the offer was not accepted within the time provided.
Shortly thereafter (and likely having realized the seriousness of its position), 21st Century affirmatively offered the “full” $150,000 to settle the case against Tapia. Plaintiff did not accept this offer, but a month later plaintiff’s counsel served a statutory offer to compromise pursuant to Code of Civil Procedure section 998. This offer sought $3,000,000 for Cory Driscoll and $1,150,000 for his mother Jenny Driscoll. Shortly before the expiration of this offer, 21st Century sent to Tapia a letter warning him that it would not agree to be bound if Tapia personally elected to accept the offer. Nonetheless, Tapia, in January of 2009, agreed to the entry of a stipulated judgment in the amounts demanded by plaintiff. 21st Century paid $150,000 plus interest to the plaintiff—the amount represented by all three policies. Tapia then assigned any rights he had against 21st Century to plaintiff. This assignment and agreement included plaintiff’s promise not to execute on the judgment against Tapia so long as he complied with his obligations, e.g., to testify to certain facts concerning the original litigation and 21st Century’s actions. A bad faith action followed.
21st Century moved for summary judgment on two primary related grounds: first, that Tapia’s settlement without its consent vitiated any claim in excess of policy limits, and second, that there was no coverage beyond $100,000 and thus no obligation to offer more in settlement.
Defending Insurers Must Consent to Settlement
21st Century followed Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718 (“Hamilton”), in which the insured agreed to a stipulated judgment without the consent of the insurer, who was providing a defense. Hamilton holds that when the insured goes behind the insurer’s back, so to speak, and enters into a stipulated judgment, “a defending insurer cannot be bound by a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment.” (Hamilton, supra, 27 Cal.4th at p. 730.) In that case, even if the insurer’s refusal to settle is unreasonable, “the agreed judgment cannot fairly be attributed to the insurer’s conduct….” (Id. at p. 731.)
Plaintiff’s counsel took the position that Hamilton did not apply because 21st Century did agree to the stipulated judgment. The basis for the position was that 21st Century hired the attorney who represented Cy Tapia and that “therefore” the attorney’s approval of the settlement is imputed to 21st Century. That argument was rejected. The fact that Tapia’s counsel recognized that Tapia’s interests would be served by accepting the offer and therefore may have recommended acceptance as a matter of fulfilling his obligations to Tapia does not mean that 21st Century was automatically bound by the judgment.
In accordance with Hamilton, the court in 21st Century found it crucial that the judgment was not the product of an adversarial trial. It was noted that the potential for collusion between the claimant and the insured in making the stipulated judgment was obvious. (21st Century , 240 Cal. App. at *327.) The court made clear, however, that “the insured may assign any bad faith claims to the plaintiff in exchange for a covenant not to execute; the assignment will become operative after trial and in the event that an excess judgment has been rendered. (Id.)(Emphasis in original.)
The court acknowledged the Hamilton rule places the insured “in an awkward situation.” (Id.) If the lawsuit goes to judgment, and the insurance company is correct that there was no actual coverage (duty to indemnify), the insured will be responsible for the entire judgment. On the other hand, the case cannot be settled with insurance money, because the insurance company is disputing actual coverage. That evidently made no difference to the court. The court stated that the rule of Hamilton applies only where an insurer has accepted coverage and is carrying out its duty to defend. (Id. at *328; Hamilton, supra, 27 Cal.4th at p. 728.) The court reiterated the long standing rule that if an insurer refuses to defend, then the insured is free to enter into a non-collusive settlement and then maintain or assign an action against the insurer for breach of the duty to defend. In the subsequent action the amount of the settlement will be presumptive evidence of the amount of the insured’s liability. (Id.)
Risely v. Interinsurance Exchange of the Auto Club Couldn’t Save the Stipulated Judgment
To try to circumvent the rule in Hamilton, plaintiff focused on the position that 21st Century did not acknowledge coverage or a duty to defend as to either of the $25,000 policies it issued to Tapia’s aunt and grandmother. Therefore, because 21st Century failed to defend Tapia under those policies, Tapia could enter into a stipulated judgment with plaintiff that would bind the insurer. Plaintiff relied primarily on Risely v. Interins. Exch.of the Auto Club, 183 Cal. App. 4th 196 (2010)(“Risely”).
In the Risely case, Lisa Risley sued Sean Turner alleging injuries arising out of Turner’s erratic and negligent driving and his refusal to let Risely out of the car upon her repeated demands. (Id. at *201-202.) Turner tendered the lawsuit to Interinsurance Exchange of the Automobile Club (“Auto Club”), which provided two policies to Turner, an auto policy with $50,000 in limits and a homeowner’s policy with limits of $300,000. (Id. at *202.) Auto Club denied the tender under the homeowner’s policy but accepted the tender under the auto policy. (Id.) After the denial of defense under the homeowner’s policy, Turner agreed to enter into a stipulated judgment with Risely, assigning to her any claims he may have against Auto Club for its denial. (Id.) A final judgment was entered against Turner for $434,000 based on the stipulation. (Id. at *203.) Risely, thereafter, filed a suit against Auto Club for breach of contract and bad faith. (Id. at *201, 203.)
After summary judgment was entered in favor of Auto Club against Risely’s complaint, the appellate court addressed whether the stipulated judgment against Turner was binding on Auto Club, which provided a defense under the auto policy. (Id. at *207-217.) As part of its analysis, the appellate court addressed whether a non-defending insurer may be liable for breaching the duty to defend even where the insured receives a defense under another policy. (Id. at *210-217.)
After noting an insured is entitled to only one full defense, the court considered the separate issue of whether the non-defending insurer “potentially increased the insured’s exposure to personal liability.” (Id. at *210-211.) California law recognizes that an insured, who has received a full defense, is still entitled to show that it incurred increased personal liability exposure as a result of an insurer’s denial of defense if such insurer has greater policy limits than the limits of the defending insurer. “[A] defense by an insurer whose policy has a limit far below the amount claimed cannot be equated to the defense of an insurer who stands to lose 10 times as much as the insurer who defends.” (Id. at *211, quoting Wint v. Fidelity & Cas. Co. (1973) 9 Cal.3d 257 263.) The Risely court also relied on other courts following Wint as support for the proposition that an insured may suffer damages where the defending insurer “has a policy limit far below the amount claimed, and far lower than the insurer who declines the defense.” (Risely, supra, at *212, citing Safeco Ins. Co. of America v. Parks (2009) 170 Cal.App.4th 992, 1005.) Applying these cases, the Risely court reversed summary judgment to Auto Club finding Auto Club had not demonstrated that Turner did not face increased personal liability exposure as a result of its denial of defense under the homeowner’s policy which had $250,000 more in policy limits than the defending auto policy. (Risely, supra, at *213-217.)
Attempting to use Risely as a blueprint, plaintiff in 21st Century argued the stipulated judgment resulted from the insurer’s refusal to defend under its second and third policies. In contrast to Risely, the Court of Appeal rejected that argument. To support its rejection the court struggled to distinguish Risely without completely overruling it. The court said the insurer in Risely defended under a relatively small ($50,000) auto policy and denied coverage under a much larger ($300,000) homeowners policy. Here, 21st Century defended under the larger ($100,000) policy and denied coverage under two smaller ($25,000) policies. Thus, it did not present the situation where the insurer may have provided a less robust defense because its exposure was small.
More importantly, the court found there was no coverage under the smaller 21st Century policies. Those polices only covered non-owned autos that were unavailable for Tapia’s “regular use,” and Tapia testified early on in the case that he had “regular use” of the vehicle involved in the accident. According to the court, even if 21st Century had accepted Tapia’s defense under the smaller policies, it would have been reasonable to pull its defense under those policies after Tapia’s deposition. Because no defense was owed under the smaller policies when the $150,000 demand was made, 21st Century was not in breach of its duty to defend, and Tapia breached the policy by consenting to a judgment without its consent under Hamilton v. Maryland Cas. Co., supra, 27 Cal. 4th 718 (2002) (if insurer is defending, insured must consent to settlement).
Lastly, the court rejected plaintiff’s last ditch argument that, even if there was no coverage beyond the $100,000 policy, it unreasonably failed to inform Tapia of the $150,000 demand so he could pay the $50,000 shortfall. The court inferred that Tapia didn’t have $50,000 and would have been better off declaring bankruptcy and pointed out that the stipulated judgment was simply premature. The court stated once again that if 21st Century breached an obligation to inform Tapia of the demand, his remedy was to continue complying with the policy conditions, allow the case to be tried, incur an excess judgment, and then assign Driscoll his rights against 21st Century. Because that was not done, Tapia violated Hamilton’s prohibition against settling while being defended.
Several lessons can be taken away from 21st Century. First, if an insurer is providing a defense to its insured, the insured may not, without the insurer’s consent, stipulate to a judgment in favor of the plaintiff. If the insurer is defending the insured, and the insurer allegedly breaches its duty to accept a reasonable settlement demand within the policy limits, the insurer’s breach becomes actionable only after a trial results in an excess judgment against the insured. (See, Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718.) 21st Century underscores that an insured with insurance defense does not sustain damages in excess of the policy limit by virtue of a stipulated judgment, unless an excess judgment has been rendered through an adversarial proceeding. Second, the difference in the amount of limits between the defending insurer’s lower policy limit and the non-defending insurer’s higher policy limit does not necessarily mean that Risely and Wint apply; rather the disparity must be “significant.” Lastly, the plaintiff’s attorney must ensure that the purported “settlement demand within policy limits” is actually “within policy limits.” An erroneous policy limits demand in excess of the policy limits could insulate the insurer from bad faith liability because it had no contractual duty to accept such a demand.