Brown v. Guarantee Insurance

Plaintiff has appealed from an order sustaining defendant’s demurrer without leave to amend and from the judgment entered thereon. Plaintiff’s complaint alleges the following: that he was injured by the negligent driving of one Charles M. Weisenberg (hereinafter referred to as the insured); that as a result he suffered damages in excess of $15,000; that before the accident defendant had, for a good and valuable consideration, issued and delivered to the insured a policy of public liability insurance which purported to indemnify the insured for bodily injury up to and including $5,000 (for any one person) which the insured might become liable to pay by reason of the operation of his motor vehicle; that defendant was required to act in good faith and with care in representing and protecting the insured in any claim or litigation arising from the operation of his vehicle; that plaintiff commenced an action against the insured; that the law firm which defendant hired to defend the action did not act in the best interests of the insured; that defendant did not act in the best interests of the insured and “did not exercise the good faith required of [it] by law in the handling of said claim and litigation on behalf of the assured”; that plaintiff offered to settle the litigation for $5,000; that defendant refused to make any offer of compromise before trial; that at the trial defendant made offers of settlement in the amounts of $3,000, $3,500, and $4,000, but at no time would pay the policy limit; that defendant “throughout maintained that unless [it] could save some money on the settlement, [it] had no reason to settle”; that this attitude was in complete disregard of the insured’s rights and best interests; that throughout the handling of the litigation the insured “was not notified of the status of any

The first question which must be determined by this court is whether or not an insured has a cause of action against the insurer for the latter’s wrongful refusal to settle a claim against the former. Concomitantly this court must ascertain the character and limitations of such a cause of action. It is our conclusion that when an insurer engages in compromise negotiations of a claim against the insured, it owes the insured a duty to exercise good faith, for the breach of which it is liable in damages.

At the outset it should be noted that we are dealing with the situation where the injured party offers to settle for an amount within the limits of the policy. Beyond these limits the power of the insurer to act in behalf of the insured ceases. The conflict of interest which arises when an offer is made to settle for a sum closely approaching the policy limits is thoroughly considered in the recent ease of Radcliffe v. Franklin Nat. Ins. Co., 208 Ore. 1 [ 298 P.2d 1002 ,1011-12] : “If the limit is $5,000, the complaint seeks $40,000 damages, and the plaintiff offers to accept $4,000 as satisfaction, the conflict of interests between insurer and insured is apparent. In the conflict each thinks of Ms own weal. The insured, prompted by a desire to be free from uncertainty, may demand that the insurer settle a claim which is completely unfounded, but in policies such as the one before us, the insurer limits its promise to ‘sums which the insured shall become obligated to pay by reason of the liability imposed upon him by law

“In resolving problems such as the one before us, any one of several approaches to the issues may present itself. The solution may be sought in the terms of the policy itself, and the court may attempt to resort to contract law. Or the insurer may be viewed as a fiduciary, possibly as an agent, and thereupon the court will employ the principles of law which govern an agent’s relationship to his principal. In such situations the law generally demands good faith. Or the courts may turn to tort law and hold that the insurer in dealing with the defense, including the matter of settlements, must exercise due care.”

Many of the cases recognizing the insured’s cause of action against the insurer for wrongful refusal to settle are discussed in the Radcliffe case, supra. In addition there is an excellent classification of the cases on this subject in 40 American Law Reports 2d 168. The compiler of the annotation states (pp. 171-72) that “the vast majority of the courts have held, and it is probably the accepted rule in all jurisdictions at this time, that the insurer is bound to give some consideration to the insured’s interest in such a situation, and the pronounced split in the decisions involves the question whether the insurer’s obligation is only to act in ‘good faith’ to the insured in considering such an offer, or whether it is required to exercise ‘due care’ and is liable for a negligent rejection of the compromise.”

As yet no appellate court in this state has passed upon the question now before this court. However, a Ninth Circuit ease, Christian v. Preferred Acc. Ins. Co., 89 F.Supp. 890 , has held such an action exists in California and is based upon bad faith rather than negligence. The court stated: “Ordi

The reasoning of the court in Hilker v. Western Automobile Ins. Co., 204 Wis. 1 , 12 [ 231 N.W. 257 , 235 N.W. 413 , 414-15], is particularly appropriate here: “In express terms the contract imposes no duty at all a breach of which makes the insurer liable to the insured for a failure to settle or compromise a claim. However, all courts are agreed that the insurer does owe to the insured some duty in this respect. This duty is implied as a correlative duty growing out of certain rights and privileges which the contract confers upon the insurer. By the terms of this contract the absolute control of the defense of such actions is turned over to the insurer, and the insured is excluded from any interference in any negotiations for settlement or legal procedure. It is generally

“It is the right of the insurer to exercise its own judgment upon the question of whether the claim should be settled or contested. But because it has taken over this duty, and because the contract prohibits the insured from settling, or negotiating for a settlement, or interfering in any manner except upon the request of the insurer, such as assisting in the securing of witnesses, etc., its exercise of this right should be accompanied by considerations of good faith. Its decision not to settle should be an honest decision. It should be the result of the weighing of probabilities in a fair and honest way. If upon such consideration it decides that its interest will be better promoted by contesting than by settling the claim, the insured must abide by whatever consequences flow from that decision. He has so agreed. But, as already stated, such decision should be an honest and intelligent one. It must be honest and intelligent if it be a good-faith conclusion. In order that it be honest and intelligent it must be based upon a knowledge of the facts and circumstances upon which liability is predicated, and upon a knowledge of the nature and extent of the injuries so far as they reasonably can be ascertained.

“In addition to this a further duty plainly devolves on the insurer. After it has made an investigation of the accident and the injury, and faces the probability that a recovery will exceed the indemnity, it plainly becomes the duty of the insurer to indicate such fact to the insured, to the end that he may take such steps as may be open to him for his own protection. . . . The company owes this duty to insured because it has taken over all of the rights which formerly belonged to the insured, which could be exercised by him to place him in possession of the facts suggesting the possibility or probability of a recovery beyond the limit of the indemnity. Because the contract takes away these rights from the insured and transfers them to the insurer, the insurer owes to the insured the implied duty to so exercise them as to discover the possible extent of the liability and to communicate such fact to the insured.”

The court in Southern Fire & Cas. Co. v. Norris, 35 Tenn. App. 657 [ 250 S.W.2d 785 , 790], points out: “The insurer is under no duty to compromise a claim for the sole benefit of its insured if to continue the fight offers a fair and reasonable prospect of escaping liability under its policy or of getting off for less than the policy limit. The insured surrenders to the insurer the right to investigate and compromise or contest claims knowing that, in event of a claim, the insurer will have its own interests to consider. But an insured also has a right to assume that his interests will not be abandoned merely because the insurer faces the prospect of a full loss under the policy. The relation is one of trust calling for reciprocity of action. The insured owes the duty of full co-operation—the insurer the duty of exercising good faith and diligence in protecting the interest of its insured.”

The court in the Radcliffe case, supra, states at page 1023 [298 P.2d] : “Plainly, an automobile owner who procures a policy of limited liability insurance understands that the company is in business and that unless it looks after its own interests it cannot expect to survive. The insurer, obviously, has a right to give heed to its own interests when it considers settlement offers, but when it does so it must give at

It is apparent from the authorities above noted that the law imposes a duty upon the insurer when it undertakes to defend an action against the insured and enters negotiations for settlement. Because the relationship between the insured and the insurer under such circumstances closely approximates that of principal and agent or beneficiary and trustee, most courts have based liability upon bad faith rather than upon negligence. One reason for rejecting the negligence test was pointed out in Noshey v. American Automobile Ins. Co., 68 F.2d 808 . In reversing an order sustaining a demurrer to plaintiff’s complaint, the court stated (pp. 809-810): “It appears to be well settled in cases of limited liability insurance that the insurer may so conduct itself as to be liable for the entire judgment recovered against the insured although the judgment exceeds the amount of liability named in the policy. Some of the cases hold that the insured is entitled to recover upon proof that the insurer in refusing to settle a claim for damages was guilty of negligence. In so far as any standard of due care may be applied to the exercise of an honest judgment in accepting or refusing an offer of compromise, the test is rejected in the better reasoned cases, and we think rightly so. The practical difficulties in applying such standard are at once suggested by the rhetorical question in the Best Building Company case, supra [Best Bldg. Co. v. Employers’ Liability Assur. Corp., 247 N.Y. 451 ( 160 N.E. 911 , 71 A.L.R 1464 )], ‘We may ask what would constitute negligence in the failure to settle a case, as distinguished from bad faith,’ and by the laconic observation of the Kentucky Court in Georgia Casualty Company v. Mann, 242 Ky. 447 [ 46 S.W.2d 777 , 779], ‘The gift of prophecy has never been bestowed on ordinary mortals. ’ Nor within the policy limits has the insurer any contract obligation to effect settlement, as the policy contains no promise that it will do so under any and all conditions or circumstances, and none is to be implied, and beyond the

The complaint in the case at bar alleges that the insurer did not act in good faith when it refused to accept the injured claimant’s offer to settle, that it insisted it had no reason to settle unless it could thereby save some money, that it did not notify the insured of any offer of settlement, and that the insured was therefore damaged to the extent that the judgment against him exceeded the policy limit. Although the complaint contains several conclusions of law, it does state facts sufficient to constitute a cause of action im, favor of the insured. Under the facts alleged a jury could have found that defendant breached its duty to exercise good faith when it refused to settle for $5,000. (See Lanferman v. Maryland Cas. Co., 222 Wis. 406 [ 267 N.W. 300 ].)

Defendant argues that payment by the insured of the amount of the judgment in excess of the policy limit is a prerequisite to his cause of action for wrongful refusal to settle. It is true that some courts have held that payment by the insured is a condition precedent to his cause of action against the insurer. (State Automobile Mut. Ins. Co. v.

“Moreover, the judgment which plaintiffs claim they were caused to suffer, or to incur, by the ‘bad faith’ of defendant, survives for 10 years from its rendition and is subject to being kept alive . . . whereas, the tort, here alleged to have been committed by defendant against the plaintiffs, became complete upon the finality of the judgment against them, and . . . they must sue on that tort within [the statutory period of limitation] or the action will be barred.”

The analogy drawn by the court in the Wessing ease, supra, applies equally in California since it has long been established in our state that a plaintiff may recover for medical expenses which he has incurred but not yet paid. (Nelson v. Kellogg, 162 Cal. 621 , 623 [ 123 P. 1115 , Ann.Cas. 1913D 759].)

The early case of Schwartz v. Norwich Union Indemnity Co., 212 Wis. 593 [ 250 N.W. 446 ], also holds that the insured’s cause of action arises when his liability is fixed by a judgment against him. The court reasoned as follows (p. 446): “One who has been subjected to a judgment by reason of fraud practiced upon him by another standing in the relation of insurer is entitled to relief even though he has not paid the judgment. A cause of action in his favor arises and his damage occurs when the liability becomes thus fixed. Neither the right of action nor the measure of damages depends upon the fact of payment. It is enough if by reason of the appellant insurer’s fraud the respondent must submit to a liability to pay and the precise sum which he is liable to pay is known, or ascertainable, for then there is no difficulty in fixing the amount of damages. Liabilities resulting from tortious acts are included in damages when they become certain. . . . The judgment constitutes a legal injury to the judgment debtor regardless of failure of payment previous to the action. ’ ’

The next question which this court must determine is whether the insured’s cause of action against defendant passed to the trustee in bankruptcy and from the trustee to the plaintiff herein. Defendant contends that the cause of action for an insurer’s wrongful refusal to settle sounds in tort rather than contract, and as such it does not pass to the trustee in bankruptcy and is not assignable by the trustee. It would be fruitless for us to attempt to determine at this point whether the insured’s claim against defendant is a cause of action in tort or in contract. Undoubtedly a provision in an insurance contract could be so worded that the insurer’s wrongful refusal to settle would constitute a breach of the contract. But the insurance contract in the instant case is not before the court and we could merely surmise what is provided therein. Moreover, the crucial question is not whether the action is tort or contract, but whether it is the type that will pass to the trustee in bankruptcy and will be assignable by him to others. Therefore, we will assume that the action sounds in tort and determine the issue accordingly. Included in the property which passes to the trustee in bankruptcy are the bankrupt’s “rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded or sequestered: Provided, That rights of action ex delicto for libel, slander, injuries to the person of the bankrupt or of a relative, whether or not resulting in death, seduction, and criminal conversation shall not vest in the trustee unless by the law of the State such rights of action are subject to attachment, execution, garnishment, sequestration, or other judicial process. . . .” ( 11 U.S.C.A. § 110 (a) (5).) No court has ever determined whether the cause of action here involved passes to the trustee in bankruptcy. However, it has been held that an insured’s cause of action against the insurer for false representations passed to the trustee in bankruptcy. (Connolly v. National Surety Co., 35 Ohio App. 76 [ 171 N.E. 870 ].) And there is

Civil Code, section 954, provides in part: “A thing in action, arising out of the violation of a right of property, or out of an obligation, may be transferred by the owner.” Under this section it is clear that the insured’s cause of action is assignable if it is based upon contract. However, it is nevertheless assignable even if based upon tort. In Wikstrom v. Yolo Fliers Club, 206 Cal. 461 [ 274 P. 959 ], the court held that a cause of action to recover damages for fraud in the sale of land was assignable. The court quoted (p. 463) the following from Street’s Foundations of Legal Liability: “As regards particular results, it is pretty generally held in America that the only causes or rights of action which are not transferable or assignable in any sense are those which are founded upon wrongs of a purely personal nature, such as slander, assault and battery, negligent personal injuries, criminal conversation, seduction, breach of marriage promise, malicious prosecution, and others of like nature. All other demands, claims and rights of action whatever are generally held to be transferable. In conformity with the principle just

“In fact, in California, without reference to the statutory enactments, this court, in Rued v. Cooper, 109 Cal. 682 , 693 [ 34 P. 98 ], approved language as follows, based upon a consideration of the English and American eases then in existence: ‘Assignability of things in action is now the rule; nonassignability, the exception; and this exception is confined to wrongs done to the person, the reputation, or the feelings of the injured party, and to contracts of a purely personal nature, like promises of marriage.’ We have no doubt that under the above general doctrine alone, the cause of action in question must be held assignable and to have survived. [Citation.]

Applying these principles to the instant case, the inescapable conclusion is that the insured’s cause of action is assignable even if it does arise out of a tort. The action in no way resembles the wrongs of a purely personal nature (e.g., slander, assault, negligent personal injuries) which are held not to be assignable. The cases cited by defendant are therefore not in point. On the other hand, the action does resemble strikingly wrongs relating to property (e.g., conversion, deceit) . The analogy between this action and one for deceit is close. In the latter case the defendant fraudulently obtains one’s money or property; in the former the insurer’s bad faith causes the insured to suffer a judgment, indirectly depriving him of money or property. It is of no consequence that in the former case the defendant does not directly benefit by the wrong; the action is based upon the detriment to the insured, not the benefit to the insurer. Moreover, as previously noted, in both situations the wrong grows out of the relation created by the contract between the parties. In addition it should be noticed that the very basis of the insured’s cause of action is the damage that he is forced to suffer because of the insurer’s wrongful act. The act strikes the insured in his pocketbook and diminishes his estate (cf. Jackson v. Deauville Holding Co., 219 Cal. 498 , 500-501 [ 27 P.2d 643 ]) ; it does not harm his person or his personality. If the act is a tort, it is a tort affecting the insured’s property and is not personal to him. The modern trend in favor of assignability dispels any remaining doubts concerning the transferability of the insured’s claim.

We have thus determined that the insured’s cause of action for wrongful refusal to settle could validly pass to