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44
Cal. 3d 775, *; 750
P.2d 297, **; 1988
Cal. LEXIS 49, ***;
244 Cal. Rptr. 655 ALVIN
S. ISAACSON et al., Plaintiffs and Appellants, v. CALIFORNIA INSURANCE GUARANTEE
ASSOCIATION, Defendant and Respondent L.A.
No. 32116 Supreme
Court of California 44
Cal. 3d 775; 750 P.2d 297; 1988 Cal. LEXIS 49; 244 Cal. Rptr. 655 March
7, 1988 SUBSEQUENT HISTORY:
[***1]
Respondent's Petition for a Rehearing was Denied April 6, 1988, and the Opinion
was Modified to Read as Printed Above. PRIOR HISTORY:
Superior Court of Los Angeles County, No. C277667, Earl F.
Riley, Judge. DISPOSITION:
The judgment of the Court of Appeal, reversing the trial court's judgment of
nonsuit, is reversed. COUNSEL:
Rosenfeld, Meyer & Susman, Walter S. Weiss, Thomas Larry Watts and James Y.
Leong for Plaintiffs and Appellants. Gantz & Forer, Emmett J. Gantz and Steven B. Stevens as
Amici Curiae on behalf of Plaintiffs and Appellants. Clausen, Harris & Campbell, Kenneth H. Clausen, Marie
D. Clause, Lon Harris, Stanley T. Gilliam, Frederick G. Hall, Overton, Lyman
& Prince, Hawkins, Schnabel & Lindahl and Kelley K. Beck for Defendant
and Respondent. Parkinson, Wolf, Lazar & Leo, Richard B. Wolf, Michael
W. Connally and Robert J. Kent as Amici Curiae on behalf of Defendant and
Respondent. JUDGES:
Opinion by Lucas, C. J., with Broussard, Panelli, Arguelles, Eagleson and
Kaufman, JJ., concurring. Separate dissenting opinion by Mosk, J. OPINIONBY:
LUCAS OPINION:
[*779]
[**300] In
this case two insureds of an insolvent insurance company seek damages from the
California Insurance Guarantee Association [*780]
(CIGA) following settlement of a [***2]
claim by a third party against the insureds. In 1974, Andrew Ouellette sued
Doctors Alvin S. Isaacson and Sidney S. Grant (plaintiffs herein) alleging
malpractice in the course of surgery performed on his lower back. Imperial
Insurance Company (Imperial), from which plaintiffs and their professional
corporation had obtained a liability insurance policy with limits of $ 1
million, accepted plaintiffs' defense and retained an outside law firm to
represent them. In January 1978, Imperial was adjudged insolvent and CIGA
assumed the doctors' defense pursuant to Insurance Code section 1063.2. (All
further statutory references are to this code unless otherwise indicated.) The
malpractice case settled for $ 500,000. CIGA paid $ 400,000 (the maximum amount
it offered to settle) and plaintiffs, fearing liability beyond CIGA's $ 500,000
limit if the case proceeded to trial, paid the additional $ 100,000. Plaintiffs
now seek to recover from CIGA reimbursement for the $ 100,000 they paid to
settle, and additional damages based on several tort theories. We address several primary issues: (1) whether CIGA can be
held liable for tort damages for violations of the Unfair Practices Act (§ 790
[***3] et
seq.), for intentional infliction of emotional distress, or for common law
breach of the implied covenant of good faith and fair dealing; (2) if CIGA is
not subject to liability for tort damages under these three theories, whether it
may nonetheless be subject to liability for reimbursement in the event it fails
to fulfill its statutory duties under sections 1063 to 1063.14 n1 (hereafter
referred to as the Guarantee Act); and (3) whether voluntary contribution by an
insured in settlement, to supplement CIGA's payment in settlement of less than
its statutory maximum, constitutes presumptive proof of the insured's liability
for the full amount of the settlement, absent a failure to provide coverage or a
refusal to defend by CIGA. We hold that CIGA is immune from liability under the
Unfair Practices Act and under the [**301]
theories of intentional infliction of emotional distress and common law bad
faith. n2 In so holding, we observe that CIGA nonetheless may be subject to
liability for reimbursement to insureds if it breaches its statutory duty under
the Guarantee Act to pay and discharge "covered claims," although
plaintiffs failed to establish such liability here. We also hold that [***4]
the insureds' [*781]
$ 100,000 settlement contribution does not create a presumption that they are
liable, in the amount they paid, on the underlying claim. n3 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n1 The Legislature recently amended sections 1063.1 and
1063.2. (Stats. 1987, ch. 833.) These amendments apply only to claims resulting
from insured events occurring on or after January 1, 1988. (Stats. 1987, ch.
833, § 3.) Because the amendments are inapplicable here, we do not discuss
them, other than to note that they further restrict the definition of what
constitutes a "covered claim" payable by CIGA. Our citations in this
opinion are to the prior statutory language. n2 Contrary to the dissent's assertion that our opinion
insulates CIGA "from all tort liability" (post, at p. 796),
our discussion addresses CIGA's tort liability only in relation to the claims
adjustment process. Nothing in the opinion affects the ordinary tort liability
of CIGA and its employees outside this context. (Cf. § 1063.12, subd. (b).) n3 Because of these conclusions, we find it unnecessary to
reach the issues, raised by the parties, of CIGA's potential liability for
attorney fees or punitive damages. In addition, because we conclude CIGA cannot
be held liable for damages on a cause of action under the Unfair Practices Act,
we do not reach the issue of whether there was a sufficient
"conclusion" of the underlying action in this case to give rise to a
section 790.03 claim, under Royal Globe Ins. Co.
v. Superior Court (1979) 23 Cal.3d 880 [153 Cal.Rptr. 842, 592
P.2d 329]. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - [***5]
I. Facts A. The Underlying Claim of Negligence Before April 1973, Ouellette complained of a nagging
backache and pain in his left leg. Dr. Isaacson diagnosed Ouellette's symptoms
as resulting from deterioration of vertebrae in his lower back. Isaacson
informed Ouellette that in his judgment, without surgery, Ouellette would be
paralyzed by age 40. Isaacson recommended surgery and Ouellette, then age 27,
agreed. Plaintiffs performed the operation in April 1973. The
surgery was not a success -- it aggravated Ouellette's condition, and apparently
caused new complications. Dr. Isaacson and another doctor performed corrective
surgery in June 1973, but this failed to relieve all of Ouellette's disability. As part of Imperial's investigation of Ouellette's claim,
Dr. Thomas Redden, an orthopedist, examined Ouellette and concluded that he was
severely crippled. Redden, however, also indicated that nothing in the medical
records suggested the surgery itself was performed negligently. Further, he
stated, "Dr. Isaacson was within the standard of practice in recommending
surgery if he was convinced that the symptomatology he received from [Ouellette]
at that time was significant." [***6]
The doctors' counsel reported to CIGA that they could "put on a strong case
that the events of the first and second surgery were well within the standards
of practice of orthopedic surgeons." Ouellette's own expert on damages, Dr.
Sidney Walker, criticized the surgery as premature, but in his report expressed
no opinion as to whether the surgery was performed negligently. In sum, it was
not clear whether plaintiffs were negligent. Assuming Ouellette could prove the doctors were negligent,
the amount of potential damages remained uncertain. First, Ouellette's work
record was sporadic even before the April 1973 operation. Second, despite
estimates by doctors for both parties that Ouellette had a 50 percent chance of
returning to work if he underwent further corrective surgery, Ouellette refused
to submit to another operation. His refusal was contrary to the advice of all
[*782] the
physicians Ouellette consulted after his second operation. In addition, Dr.
Redden indicated that if Ouellette underwent a fusion operation, "there was
a 60% favorable chance of eliminating most of his disability with such a
surgery" if it were performed using the dorsal approach, and "a 95%
chance [***7]
of success" if it were performed using the frontal approach. Redden
definitely recommended surgery. Nonetheless, throughout the course of settlement
negotiations, Ouellette refused to have corrective surgery. B. The Settlement With Ouellette While Imperial was still solvent, plaintiffs' counsel
estimated that if a jury found Ouellette was totally disabled, the verdict could
be "in the neighborhood of $ 750,000." [**302]
Counsel informed Imperial that if the jury found that Ouellette was only
partially disabled, then the verdict range would be near $ 375,000. Ouellette
requested $ 1 million -- the full extent of Imperial's coverage -- to settle the
case. After Imperial was adjudged insolvent, and CIGA assumed
plaintiffs' defense, CIGA retained the same law firm Imperial had already hired
to defend plaintiffs against Ouellette's claim. Ouellette dropped his settlement
demand to $ 500,000, the statutory limit of CIGA's coverage. (§ 1063.1, subd.
(c)(6) ["'Covered claims' shall not include that portion of any claim,
other than a claim for workers' compensation benefits, which is in excess of
five hundred thousand dollars ($ 500,000)"].) After deposing most of Ouellette's expert witnesses, [***8]
plaintiffs' counsel informed CIGA, "it is still [my] opinion that this case
is a 50-50 proposition. The verdict value is approximately $ 750,000 in the
event of an adverse verdict. It could go higher and it could come in for less.
Because there is a substantial risk of an adverse verdict in excess of the [$
500,000] policy limits that you have asserted, we must recommend and request
that you tender your total coverage to [Ouellette] to settle this action." CIGA's claim administrator replied, "I agree with your
evaluation, as does the file, that the liability is no worse than 50-50.
I also agree that the verdict could reach a $ 750,000 figure if we disregard
our defensive possibilities. On that basis, a reasonable settlement value
would not be more than $ 350,000." (Italics added.) Plaintiffs then retained new counsel who demanded that CIGA
tender its $ 500,000 limit to meet Ouellette's settlement demand. CIGA refused
to pay more than $ 400,000. Finally, at the mandatory settlement conference,
plaintiffs, at the suggestion of the settlement judge, and with CIGA's
knowledge, agreed to pay $ 100,000 in addition to CIGA's $ 400,000 and [*783]
thus ensure a settlement. [***9] Plaintiffs then sued CIGA, seeking
reimbursement for the amount they paid Ouellette, as well as compensatory and
punitive damages for CIGA's alleged bad faith. C. The Action Against CIGA Plaintiffs' second amended complaint purported to state
three causes of action against CIGA. First, they sought to recover $ 100,000 on
the theory that the entire settlement amount of $ 500,000 constituted a
"covered claim" which CIGA was required to pay under the Guarantee
Act. In the remaining causes of action they sought both compensatory and
punitive damages for "bad faith" (apparently based on breach of the
implied covenant of good faith and fair dealing) and intentional infliction of
emotional distress. CIGA demurred to the causes of action for "bad
faith" and intentional infliction of emotional distress. The trial court
sustained the demurrer without leave to amend. The court relied on the absence
of contractual privity between plaintiffs and CIGA for its ruling on the
"bad faith" claim, and on plaintiffs' insufficient allegation of
outrageous conduct on the emotional distress claim. For both causes of action it
also cited section 1063.12, which limits CIGA's liability. n4 Plaintiffs [***10]
later moved to amend their complaint to add an express cause of action for
breach of the Unfair Practices Act. The trial court denied the motion, on the
ground that the issue of CIGA's liability for bad faith had already been decided
against plaintiffs. n5 On the claim for reimbursement of the $ 100,000 paid by
plaintiffs, the court ultimately granted a nonsuit in favor of CIGA. - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n4
n5 Both parties and the Court of Appeal addressed the issue
of whether CIGA is liable under the Unfair Practices Act, and we consider the
question here as well. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - The Court of Appeal reversed. It held the trial court had
erred in disallowing the cause of action [***11]
based on [**303]
violation of the Unfair Practices Act, and in granting the judgment of nonsuit
on the reimbursement claim. It also concluded CIGA was subject to liability for
damages for intentional infliction of emotional distress, although it held
plaintiffs had abandoned that claim. We reverse the judgment of the Court of
Appeal. II. Discussion A. CIGA's Immunity From Tort Liability Plaintiffs argue CIGA is liable for compensatory and
punitive damages under three tort theories: violation of the Unfair Practices
Act (§ 790 et [*784]
seq.), intentional infliction of emotional distress, and common law breach of
the implied covenant of good faith and fair dealing. They base their argument on
the premise that CIGA is "essentially the assignee" of the insolvent
Imperial, and must accept the common law and statutory "burdens" of
tort liability because it has accepted the "benefits" to which
Imperial was entitled under the contract between Imperial and plaintiffs. In
response, CIGA maintains that the Legislature, in creating CIGA to fulfill the
quasi-public function of protecting insureds whose insurance companies become
insolvent, gave it immunity from tort liability arising [***12]
out of its handling of claims, in section 1063.12, subdivision (a). We conclude
that the legislative intent and the relevant statutory provisions indicate that
CIGA is immune from liability as to each of plaintiffs' tort claims. CIGA was created by legislation in 1969 (§ 1063 et seq.)
to establish a fund from which insureds could obtain financial and legal
assistance in the event their insurers become insolvent, i.e. "to provide
insurance against 'loss arising from the failure of an insolvent insurer to
discharge its obligations under its insurance policies.' (Ins. Code, §
119.5.)" ( Biggs
v. California Ins. Guarantee Assn. (1981) 126 Cal.App.3d 641, 644
[179 Cal.Rptr. 16]; see § 1063, subd. (a).) All insurers transacting
insurance business in California are involuntary members of CIGA, unless
specifically exempted by statute. (§§ 1063, subd. (a), 1063.1, subd. (a).) CIGA undertook the plaintiffs' defense in this case
pursuant to section
Section
- - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n6 Now section 1063.2, subdivision (h). (See ante,
fn. 1.) - - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - 1. Immunity Under the Unfair Practices Act Section
The Court of Appeal concluded the Unfair Practices Act
applied to CIGA. This holding conflicted with Interstate
Fire & Casualty Ins. Co. v. California Ins. Guarantee Assn.
(1981) 125 Cal.App.3d 904 [178 Cal.Rptr. 673]. [***15]
In Interstate, a primary liability insurer with liability limits of $
100,000 became insolvent and CIGA assumed the defense of the insured. The
injured party obtained a judgment against the insured for $ 217,250, of which
CIGA paid $ 100,000 and Interstate, the excess liability insurer, paid the
balance. Interstate then sued CIGA, alleging CIGA had violated the Unfair
Practices Act because it "had opportunities to settle the injury claim
within the limits [of the insolvent insurer's policy] but . . . unreasonably
failed to do so." ( Id.,
at p. 908.) The court sustained CIGA's demurrer to this claim without leave
to amend. Affirming the judgment, the Interstate Court of
Appeal held that imposing Unfair Practices Act liability on CIGA would conflict
with the Guarantee Act's explicit limitation on CIGA's liability. (§ 1063.12,
subd. (a).) It found the broad, general language of the Unfair Practices Act
insufficient to impose a duty "upon a unique and specialized association
whose liability is expressly limited by its organic law." (125
Cal.App.3d at p. 912.) The court based its holding on three factors. The
[***16]
first was that the Guarantee Act was intended to provide "a limited form of
protection for the public," but not to protect insurers when their
competitors became insolvent. (Ibid.) Second, the court noted that
section 1063.12, subdivision (a), gives CIGA a specific "grant of
immunity," and stated, "Ordinarily such a specific and limited
provision is deemed to control over any general statement, if there is a
conflict. [Citations.]" (125
Cal.App.3d at pp. 912-913.) Third, insureds are protected from abusive
practices by CIGA because the Insurance [*786]
Commissioner is "required by law both to enforce the Unfair Practices Act
and to regulate and oversee CIGA." ( Id.,
at p. 914.) As the court observed, "This statutory relationship is such
that the court is entitled to view the practices of CIGA as reflecting the
Insurance Commissioner's interpretation of the applicable statutes." (Ibid.)
By contrast, in the present case, the Court of Appeal held
that "[section] 1063.12 has no application to any judgment against CIGA
based on its own tortious conduct." It found that CIGA could be held liable
for breach of the [***17] Unfair Practices Act because CIGA
"is engaged in the business of claims handling." We reject this reasoning. As other courts have recognized,
CIGA is not, and was not created to act as, an ordinary insurance company.
(E.g., Biggs
supra, 126 Cal.App.3d at p. 645.) It is a statutory entity that depends
on the Guarantee Act for its existence and for a definition of the scope of its
powers, duties, and protections. "CIGA is an involuntary, unincorporated
association of insurers admitted to transact business in California. Each
insurer is required to participate in CIGA as a condition of doing business in
this state. The statutory purpose of CIGA is to provide for each insurer member
insolvency insurance to pay the claims arising out of policies issued by an
[insurer who becomes insolvent] . . . . Funds for the payment of such claims are
obtained by collecting premium payments from its members. . . . CIGA is limited
to the payment of 'covered claims' . . . ." ( In
re Imperial Ins. Co. (1984) 157 Cal.App.3d 290, 293 [203 Cal.Rptr. 664],
fn. omitted.)
In addition, as noted, section 1063.12, subdivision (a),
expressly restricts CIGA's liability, in the discharge of its statutorily
circumscribed duties, to the amount of "covered claims." Under the
provisions of the Guarantee Act, it is clear that, contrary to plaintiffs'
contention, "
[***19]
Additional factors support the conclusion that the
Legislature intended to grant CIGA immunity from liability under section 790.03.
First, the Legislature did not make CIGA liable under the Unfair Practices Act
when it amended the Guarantee Act after the decision in Interstate,
supra, 125 Cal.App.3d 904. The Legislature amended sections 1063.1 and
1063.2 in 1983, 1984, and 1987, but has taken no action to alter the statutory
immunity of CIGA. Nor did the Legislature provide for such [***20]
liability when it amended section 790.03 in 1983, specifically in response to
another court decision. n7 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n7 Upon enacting the 1983 amendment to section 790.03, the
Legislature stated: "The United States Supreme Court decison in Arizona
Governing Committee v. Norris, interpreting Title VII of the Civil Rights Act of
1964, became effective August 1, 1983. In order for life insurers to continue to
offer insured benefits on an individual basis for persons affected by this
decision in California, it is necessary that this act take effect
immediately." (Stats. 1983, ch. 1261, § 2, quoted in 42 West's Ann. Ins.
Code (1988 pocket supp.) § 790.03, p. 76.) Thus, the Legislature demonstrated
its sensitivity to the effect of court interpretations on liability under
section 790.03. As noted, it made no similar move to disavow the Court of
Appeal's interpretation in Interstate,
supra, 125 Cal.App.3d 904. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - Second, the protective function served by the Unfair
Practices Act is less necessary with [***21]
CIGA than with an ordinary insurer. Because CIGA is not a private,
profit-oriented enterprise, it does not gain financially by refusing to defend
or settle claims. It therefore lacks economic incentive to deal unfairly with
insureds. Essentially, CIGA provides an added benefit to insureds; without CIGA,
once an insurer became insolvent, its insureds would be deprived of any benefits
or indemnification for claims that would have been covered under the policy of
the insolvent insurer. In addition, we note that in order to help insureds whose
insurers become insolvent cover their losses, CIGA in effect spreads the loss
among other insureds, in the form of increased costs to the insurance-buying
public. [*788]
Section
In sum, in the absence of evidence of a contrary
legislative intent, we conclude that Interstate,
supra, 125 Cal.App.3d 904, correctly held that
- - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n8 If CIGA abuses this immunity in a future case, relief
may be sought from the Insurance Commissioner, who is responsible for regulating
and overseeing CIGA, or from the Legislature, which may, for example, divest
CIGA of the tort immunity it currently enjoys or provide a scheme whereby tort
damages may be recovered against CIGA. Under the present scheme, however, CIGA's
liability is limited as we have set forth. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - [***23]
2. Intentional Infliction of Emotional Distress We also conclude that
We also find that in any event the trial court correctly
concluded plaintiffs failed to allege facts sufficient to support a cause of
action for intentional infliction of emotional distress. Plaintiffs based this
claim on a letter from CIGA to plaintiffs' counsel, which stated that because $
350,000 was a reasonable settlement considering their "defensive
possibilities," any settlement [***24]
by plaintiffs in excess of $ 500,000 would be unwarranted and "a possible
policy violation and a breach of good faith." Plaintiffs contended that
this letter, in addition to CIGA's failure to pay more than $ 400,000, [*789]
caused them "extreme emotional upset and turmoil." The actions alleged
fall short of conduct "'so extreme as to exceed all bounds of that usually
tolerated in a civilized community.' [Citation.]" ( Ricard
v. Pacific Indemnity Co. (1982) 132 Cal.App.3d 886, 895 [183
Cal.Rptr. 502].) The trial court correctly sustained CIGA's demurrer. (See,
e.g., Schlauch
v. Hartford Accident & Indemnity Co. (1983) 146 Cal.App.3d
926, 936 [194 Cal.Rptr. 658]; Everfield
v. State Comp. Ins. Fund (1981) 115 Cal.App.3d 15, 20 [171
Cal.Rptr. 164]; cf. Davidson
v. City of Westminster (1982) 32 Cal.3d 197, 209-210 [185 Cal.Rptr.
252, 649 P.2d 894].) 3. Common Law Bad Faith Plaintiffs also assert that CIGA should be liable for
common law bad faith, that is, for breach of the implied covenant of good faith
and fair dealing. [***25]
The trial court sustained CIGA's demurrer to this claim without leave to amend,
based on both lack of contractual privity between plaintiffs and CIGA, and
CIGA's immunity under section 1063.12. The Court of Appeal agreed that CIGA
could not be liable for nonstatutory breach of good faith and fair dealing
because of the lack of privity. Before this court plaintiffs renew their claim
that CIGA is liable for common law bad faith because it is "essentially the
assignee of policy obligations that the insolvent insurer (Imperial) owed to the
insureds." We find the trial court was correct on both grounds.
B. CIGA's Liability for Reimbursement Within the
Statutory Limits 1. Cause of Action for Reimbursement We hold in part A above that the Guarantee Act shields CIGA
from liability for damages for common law and statutory bad faith and [*790]
intentional infliction of emotional distress, by virtue of its limitation of
CIGA's obligations to the payment and discharge of "covered claims."
We
- - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n9
n10 We limit our discussion to the context of a claim by an
insured pursuant to a liability policy, where a third party has asserted a claim
against the insured. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - In this case, plaintiffs asserted such a reimbursement
claim. They contended the entire $ 500,000 settlement was a "covered
claim" that CIGA was required to pay. They argued CIGA should have agreed
to settle for its $ 500,000 statutory limit, and that it breached [***28]
its duty by refusing to do so. The trial court ruled that plaintiffs could collect
reimbursement from CIGA only if they could prove that they were liable in the
underlying malpractice action, and that their liability to Ouellette exceeded
the $ 400,000 that CIGA had already paid to settle. Rather than trying to prove
their own liability, plaintiffs elected to make an offer of proof to demonstrate
their theory that CIGA had acted improperly by failing to pay the entire $
500,000 in settlement. In their offer of proof, plaintiffs set out the history
of the settlement negotiations in the Ouellette action. (See ante at
pp. 782-783.) The evidence established $ 750,000 as the estimated maximum jury
verdict, and no offered document or testimony evaluated the chance of a verdict
against them as greater than 50 percent. The trial court then granted CIGA's
motion for nonsuit on the ground plaintiffs had not proved they were liable to
Ouellette for a sum in excess of the $ 400,000 paid by CIGA. The Court of Appeal reversed, holding that the $ 500,000
settlement was presumptive evidence of the extent of plaintiffs' liability, and
that unless CIGA proved bad faith by plaintiffs or collusion [***29]
between them and Ouellette, it was required to pay the entire $ 500,000 by
reimbursing plaintiffs for their $ 100,000 settlement contribution. It based
this holding in part on its finding that plaintiffs' offer of proof demonstrated
the "bad faith" of CIGA. We conclude that the reasoning of both courts below was
erroneous in some respects. The trial court was incorrect in holding that
plaintiffs [*791]
were required to prove their own liability in the underlying malpractice action
before they could recover [**308] reimbursement for their
settlement. The court's judgment of nonsuit was correct, however, for reasons we
will discuss, and the Court of Appeal erred in reversing it. 2. CIGA's Duty Under the Guarantee Act to Provide
Coverage and a Defense
Further,
Therefore,
3. Duty to Accept a Reasonable Settlement Offer
- - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n11 Cf. Comunale
v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659 [328
P.2d 198, 68 A.L.R.2d 883] (a private insurance carrier has a duty "to
settle in an appropriate case"); Crisci
v. Security Ins. Co. (1967) 66 Cal.2d 425, 430 [58 Cal.Rptr. 13,
426 P.2d 173] (an insurance company may incur liability for
"unwarrantedly [refusing] an offered settlement where the most reasonable
manner of disposing of the claim is by accepting the settlement"). n12 Cf. Johansen
v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d
9, 16 [123 Cal.Rptr. 288, 538 P.2d 744] (acceptance of a settlement offer
within an insurer's policy limits will be the most reasonable manner of
disposing of a claim "whenever it is likely that the judgment against the
insured will exceed policy limits").
- - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - [***34]
In reaching our decision, we emphasize that
Determination of the reasonableness of a settlement offer
for purposes of a reimbursement action is based on the information available to
CIGA at the time of the proposed settlement. (Cf. Tech-Bilt,
Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488, 499
[213 Cal.Rptr. 256, 698 P.2d 159].)
Plaintiffs had the burden of proving that the $ 500,000
settlement demand CIGA rejected was reasonable under the circumstances of the
claim. Once they established a breach of the duty to accept a reasonable
settlement offer, they could then proceed to prove damages, based on the amount
of the settlement they entered into. The Court of Appeal, however, treated the
settlement as presumptive evidence that plaintiffs were liable to Ouellette for
damages in the amount of $ 500,000, effectively implying that $ 500,000 was a
reasonable amount in settlement, and that CIGA would therefore be liable for
reimbursing plaintiffs for their $ 100,000 contribution. n13 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n13 To the extent that its treatment of the settlement as
presumptive evidence of plaintiffs' underlying liability was based on an
erroneous belief that a determination of plaintiffs' liability was a
prerequisite to their recovering reimbursement, the court confused the issues.
As we explain, the reimbursement claim depends not on proof of liability, but on
proof that CIGA failed to accept a reasonable settlement offer. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - [***36]
The Court of Appeal's conclusion that the settlement had a presumptive effect
under Lamb,
supra, 3 Cal.App.2d 624, 631-632, is erroneous. This case is factually
distinguishable from cases in which the presumption described in Lamb
applies. The presumption operates where the insurer has wrongfully refused to
cover or defend a claim, leaving the insured to mount his own defense or suffer
a default. In order to recover reimbursement [**310]
from the insurer, the insured must demonstrate that the claim was covered under
the policy in question, or that the insurer breached its duty to defend. Once a
breach of contract is proved, the insured's act of settling the claim is said to
raise the presumption that the third party's claim against him was [*794]
legitimate, and that he was liable in the amount which he agreed to pay in
settlement. (Ibid.) Here, however, CIGA never denied coverage,
nor did it refuse to defend plaintiffs in the malpractice case, and it also
agreed to participate in the final settlement by paying $ 400,000. Plaintiffs
themselves elected to protect their reputations and avoid potential liability
exposure by contributing [***37] $ 100,000 to settle, rather than
try the case.
Moreover, holding that the settlement offer created a
presumption as to the value of the third party's claim and thus a presumption as
to the reasonableness of the total settlement amount on facts such as these
would discourage future settlements generally, and reasonable settlements for
less than policy limits specifically, in contravention of well established
public policy. (See People
ex rel. Dept. Public Works v. Forster (1962) 58 Cal.2d 257,
263 [23 Cal.Rptr. 582, 373 P.2d 630]; [***38]
7C Appleman, Insurance Law and Practice (Berdal ed. 1979) § 4711, p. 367.) n14 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n14 To hold that the settlement created a presumption that
plaintiffs were liable for malpractice would also run counter to other
legal and public policy considerations. Such a treatment would disregard the
general rule that
- - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - As we have said, the judgment of nonsuit was correct,
because plaintiffs failed to offer evidence of sufficient [***39]
substantiality that CIGA breached its statutory duties in refusing to pay $
500,000 in settlement. The evidence offered by plaintiffs shows a medical
malpractice case of uncertain liability and damages. An estimated maximum
exposure of $ 750,000 was about a 50 percent possibility. This evidence does not
indicate that CIGA failed to accept a reasonable settlement offer when it
rejected Ouellette's $ 500,000 settlement demand, and instead paid $ 400,000.
Thus, in the absence of a showing that CIGA breached its statutory duties,
plaintiffs are not entitled to reimbursement. [*795]
III. Conclusion We conclude CIGA is immune from tort liability for
violation of the Unfair Practices Act, for intentional infliction of emotional
distress, and for common law bad faith, arising from its conduct in the claims
adjustment process. CIGA's liability in this context is limited by statute to
the payment and discharge of "covered claims," including payment of a
reasonable amount in settlement, up to a maximum of $ 500,000. In this case,
plaintiffs have failed to prove that CIGA breached its statutory duties, and
thus they are not entitled to recover reimbursement from CIGA. The judgment of [***40]
the Court of Appeal, reversing the trial court's judgment of nonsuit, is
reversed. DISSENTBY:
MOSK DISSENT:
[**311] MOSK,
J. I dissent. An analysis of the record clearly reveals that the
California Insurance Guarantee Association (CIGA) did not stubbornly refuse to
settle this case on the basis of the facts involved, but took its unrelenting
stand in order to deter future demands in future cases brought by future
parties. Indeed the CIGA representative candidly communicated that attitude:
"unless we stand firm right now we will be forced, on the fear of bad
faith, to pay $ 500,000 on every malpractice claim regardless of
negligence." In my view it is the duty of a court to consider only the
facts of the case before it. If we do so dispassionately here, the conclusion is
inescapable that CIGA should have paid its policy limits to the seriously
injured plaintiff. The self-protective settlement negotiated by the defendant
doctors, after CIGA refused to contribute more than $ 400,000 to satisfy
plaintiff's demands, appears to have been reasonable under the circumstances.
While CIGA constantly refers to a potential maximum liability of $ 750,000 and
only a 50-50 chance of plaintiff prevailing, it conveniently [***41]
overlooks the communication from counsel for Imperial Insurance Company
(Imperial) whom it also retained: "The verdict value is approximately $
750,000 in the event of an adverse verdict. It could go higher and it
could come in for less. Because there is a substantial risk of an adverse
verdict in excess of the policy limits that you have asserted, we must
recommend and request that you tender your total coverage to plaintiff to settle
this action." (Italics added.) The foregoing objective advice from CIGA's own counsel in
this matter follows a previous communication from him: "The liability
picture is [*796]
beginning to favor plaintiff and the damages are potentially very extensive. You
should be prepared for a policy limits demand. The case has that kind of jury
verdict potential." A subsequent letter from defense counsel to CIGA
referred to a physician's report that indicated plaintiff in his present
condition "is totally and permanently disabled." Contrary to the majority view, CIGA is in the insurance
business and is bound by the rules that govern insurance companies. While it is
not a direct insurer of policyholders, it is an insurer of insurance companies
[***42]
and hence indirectly of their policyholders. That is insurance business, pure
and simple. Thus CIGA does not have the moral or legal right to gamble with the
resources of its insured's policyholders, anymore than Imperial had such right
to so gamble in reliance on the "no action" clause in the small print
of the policy. Yet that is precisely what CIGA maintains it could do in this
case, and presumably in other cases with which it appears to be concerned. As Chief Justice Gibson held for a unanimous court in Communale
v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 660-661
[328 P.2d 198 [68 A.L.R.2d 883], a carrier that refuses to make "an
advantageous settlement when there is a great risk of liability in excess of the
policy limits" is liable to its insured for all damage "even if it
exceeds the policy limits." The New York Court of Appeal put it succinctly:
"the insurer's obligation to act in good faith for the insured's interests
may be breached in other ways than by refusing or neglecting to defend a suit.
It may be breached by neglect and failure to act protectively when the insured
is compelled to make settlement at his [***43]
peril; . . ." ( Isadore
Rosen & Sons, Inc. v. Security Mutual Ins. Co. (1972) 31
N.Y.2d 342 [339 N.Y.S.2d 97, 291 N.E.2d 380, 382].) CIGA was insistent on going to trial, contrary to the
recommendation of its own counsel, in the fond hope that it might prevail. It
was not acting protectively of the insured. If CIGA won, the gamble paid off. If
it lost, the gamble still paid off because it was responsible for only the same
$ 500,000 being demanded for settlement. The only losers in the latter scenario
would be the insured doctors, who would have been required to pay that portion
of the judgment above the $ 500,000 -- a judgment potential estimated to be $
750,000, more or less, and one that could have reached the $ 1 million
originally demanded by plaintiff as the cost of settlement with [**312]
Imperial. The proposed gamble with the doctors' resources clearly established a
prima facie case of bad faith. Yet the majority inexplicably approve a nonsuit. Despite the majority's tortured reading of the statute
creating CIGA, I cannot agree that the Legislature intended to insulate this
agency from all tort liability. If a motorist employee [***44]
of CIGA, in the course of his employment, were to negligently strike a
pedestrian in a crosswalk, CIGA should [*797] be held liable under traditional
respondeat superior doctrine. And if CIGA should be held liable for a negligent
act, a fortiori it should be held liable for an intentional tort. Unless the
Legislature were to spell it out with particularity, I cannot believe that in
this day and age it intends that any entity, even one it creates by statute, be
permitted to commit intentional torts with complete immunity. The majority
opinion elevates CIGA above the law that binds every other individual,
corporation -- and insurance company. A rare and exalted position indeed, but
frightening to contemplate. The majority dwell at length on the purported inability of
CIGA to obtain the funds with which to pay a tort judgment. I am not at all
certain that their apprehensions are justified. But in any event the ability of
a tort defendant to satisfy a judgment is wholly irrelevant to its legal
liability. Countless plaintiffs hold uncollectable judgments, but they were not
denied the opportunity to have their claims adjudicated in a court of law. In short, this case should have [***45]
proceeded to trial and judgment. While it is true, as the majority observe, that
a settlement is not always an admission of liability, more than a half century
ago the general rule was set forth in Lamb
v. Belt Casualty Co. (1935) 3 Cal.App.2d 624, 631-632 [40 P.2d
311]: "The settlement, or a judgment rendered upon a stipulation of
such a settlement, becomes presumptive evidence only of the liability of the
insured and the amount thereof, which presumption is subject to being overcome
by proof on the part of the insurer." (See also Ritchie
v. Anchor Casualty Co. (1955) 135 Cal.App.2d 245, 250 [286 P.2d
1000].) Thus the doctors should have been allowed to introduce the
settlement as presumptive evidence of liability, and any evidence in support of
the reasonableness of the settlement amount; in defense CIGA could have produced
any evidence it has to establish collusion or other indicia of bad faith in the
fact of settlement or the amount thereof; and the trier of fact could then have
determined which party is to prevail. The desirability of this trial proceeding on the merits is
underscored by the fact that [***46]
the settlement judges who considered the contentions of the parties at the trial
level expressed the belief that CIGA may have acted in bad faith. With remarkable obfuscation, the majority in footnote 2
deny they are insulating CIGA from tort liability. n1 Yet they insist CIGA
cannot be liable for anything other than the covered claims of the insolvent
insurer, and [*798]
throughout their opinion they refer to CIGA's tort immunity. Future tort victims
of CIGA will have no clear picture of their legal rights. - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - -
- - - - - - - - - - n1 The confusion of the majority is emphasized by their
reliance on section 1063.12, subdivision (b) to protest they are really not
insulating CIGA from tort liability. That section refers only to individuals who
may have served on the board or committees of CIGA and their potential
liability. It is irrelevant to causes of action against CIGA. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - -
- - - - - - - - - - Instead of allowing a full and fair trial, as did the Court
of Appeal, the majority and the trial court decide this controversy by nonsuit.
The result appears to be [***47]
unjust in this case. More ominously, the opinion can be read to insulate CIGA
from all intentional torts -- indeed, all torts. I can only hope the Legislature
promptly acts to make it clear that no agency is above the law. |
|
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Cynthia Coulter Mulvihill, APC |
