Clark v. Bellefonte Insurance

Opinion

Defendant Bellefonte Insurance Company appeals from a judgment for plaintiff Lorel Clark[1] on a special jury verdict in the sum of $15,000. The verdict is based upon a finding of breach of contract by defendant Bellefonte in connection with an insurance policy issued by Bellefonte to plaintiff. Defendant claims error in denying its motion for judgment notwithstanding the verdict and in the giving and refusal of certain jury instructions. We have concluded that the defendant was entitled to judgment notwithstanding the verdict; hence, consideration of the other contentions is not necessary.

Plaintiff Clark operated an automobile “detailing” business, as L. C. Auto Polishing, at 7046 Mission Street, Daly City, in a rented wood frame building. The business consisted of cleaning and polishing automobiles in preparation for sale or resale by automobile dealers. In general, plaintiff obtained vehicles from the lots of dealers with whom he contracted, brought the vehicles to his premises, cleaned and polished them, and returned the vehicles to the dealers. Cars were kept overnight in the building on occasions.

The coverage was renewed in 1976 with Bellefonte as the insurer under the same standard policy. No other type of garage insurance is available; in particular, a person cannot obtain insurance for losses of property of others for which he is not legally liable.

The relevant insuring clause in the garage keepers’ legal liability portion of the policy provided that: “The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of:. .. K-2. loss of an automobile caused by theft of the entire automobile;.. . occurring while such automobile is in the custody of the insured for safekeeping, storage, service or repair. . .. ” The policy limit for that coverage was $6,000, subject to a deductible of $250 per claim.

On returning to his business premises the morning of Friday, July 1, 1976, plaintiff discovered that someone had broken the lock on the door and two Cadillac automobiles were missing, one owned by Don Lucas Cadillac and the other owned by Fairway Chevrolet. The door was open and the lock was off the hinges. Plaintiff had no burglar alarm, no security patrol and no safe in which, to secure car keys. Some of the windows in the building were broken. At closing time it was plaintiff’s practice to put the car keys on top of the front tires, a custom he learned from automobile dealers who believed that was the last place anyone would look for keys. There was evidence of frequent automobile thefts from dealers in the area, even thefts from their lots during the day.

The Don Lucas automobile was recovered two days later with the tires, wheels and battery removed and a damaged fender. The ignition lock was punched, indicating it had been hot wired. That Cadillac had already been sold to a customer. Don Lucas obtained plaintiff’s permission to repair the vehicle and then deliver it to the customer. Inasmuch as the automobile had been sold, Don Lucas would have repaired it

“We leave it to your decision as to whether you wish to honor these two claims....” (Italics by the author.)

Carl George, the insurer’s claims supervisor, responded to Patane’s report by letter of August 9, 1976. George’s letter included the following: “.. . The statement obtained from the insured, in our opinion, did not really cover the entire situation. There was no mention of where the keys to these automobiles were at the time they were stolen. We did notice, on the police report, that the 1975 Cadillac ignition had been punched. Therefore, we can only assume that the keys were not in the vehicles at the time they were stolen.

“You did not follow-up with a witness statement from the alleged witness who saw the break-in. However, we feel that the information is sufficient to make a determination as to the legal liability of the insured.

“In our opinion, since there is no question that the insured’s building was broken into and the vehicles stolen, there is no legal liability on behalf of the insured. You indicate the insured’s premises are vulnerable to theft. However, what premises are not vulnerable to theft? Therefore, we do not feel a payment should be made to the owners of the stolen units since there is no legal liability on behalf of our insured.. .. ”

On August 28 Patane sent letters to Don Lucas and Fairway stating that the investigation was complete, that it disclosed that the locked premises of plaintiff were broken into by persons unknown, and that “our principal” concurs that there is no legal liability on the part of plaintiff for the theft and has instructed us to deny all claims. Pursuant to demands by the dealers, plaintiff then agreed to work off the repair costs.

“The policy provides that the company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay.

“The claims of Don Lucas Cadillac and Fairway Chevrolet were denied because the vehicles were stolen out of the insured’s locked garage. Therefore, there is no legal liability on behalf of the insured since the insured had taken all the necessary precautions for the safekeeping of the vehicles... . ”

Without further communication, so far as appears, the present action was filed on October 4, 1978, by the same law firm. The complaint was in four counts. The first cause of action alleged that defendants Jim Sullivan and Richard Shannon, doing business as Trinity Company, and Bellefonte Insurance Company misrepresented to plaintiffs Lorel and LaVerne Clark that the policy would cover plaintiffs for theft of an automobile from the premises whether or not plaintiffs were responsible for the theft. The second count was for declaratory relief. The dispute, so far as it was alleged, was that defendants contend that plaintiffs are not entitled to the benefits of the policy, whereas “Plaintiffs contend that they are covered in the event of a loss herein sustained, and as such, should be reimbursed for all losses incurred as a result of the incident alleged.”

The third count asserted that defendants “breached said contract by refusing to pay Plaintiffs for losses sustained as a result of the theft of the two automobiles from the premises.” The fourth cause of action alleged that “Defendants have refused to accept or discuss settlement or to negotiate in good faith, and Defendants did not at any time make any offer of settlement to Plaintiffs.”

The case proceeded to jury trial on the first, third and fourth counts only. The jury was given a special verdict form corresponding to the

Cases dealing with waiver or estoppel are inapplicable. It is true that the insurer may be precluded from asserting its right to control the defense. This is so when the carrier erroneously denies coverage and/or improperly refuses to defend the insured. In such a case, the insured is entitled to make a reasonable settlement of the claim in good faith and may then maintain an action against the insurer to recover the amount of the settlement and any costs or other damages resulting from the insurer’s breach of contract. (Hartford Accident & Indent. Co. v. Civil Service Employees Ins. Co. (1973) 33 Cal.App.3d 26 , 35 [ 108 Cal.Rptr. 737 ]; Northwestern Title Security Co. v. Flack (1970) 6 Cal.App.3d 134 , 146 [ 85 Cal.Rptr. 693 ]; Columbia Southern Chemical Corp. v. Manufacturers & Wholesalers Indem. Exch. (1961) 190 Cal.App.2d 194 , 204 [ 11 Cal.Rptr. 762 ]; Walters v. American Ins. Co. (1960) 185 Cal.App.2d 776 , 786 [ 8 Cal.Rptr. 665 ]; Kershaw v. Maryland Casualty Co. (1959) 172 Cal.App.2d 248 , 257, 258-259 [ 342 P.2d 72 ]; Peterson v. Allstate Ins. Co. (1958) 164 Cal.App.2d 517 , 522 [ 330 P.2d 843 ]; Russ-Field Corp. v. Underwriters at Lloyd’s (1958) 164 Cal.App.2d 83 , 98 [ 330 P.2d 432 ]; Ritchie v. Anchor Casualty Co. (1955) 135 Cal.App.2d 245 , 258 [ 286 P.2d 1000 ]; 7C Appleman, supra, § 4689, pp. 207-209; 44 Am.Jur.2d, Insurance, §§ 1546, 1547, 1550, pp. 426-428, 432; Annot. (1959) 67 A.L.R.2d 694 , 711, 717-718.)

The same consequences flow from a judgment rendered against the insured after the carrier has wrongfully refused to defend an action. The insurer is ordinarily bound by the judgment (Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558 , 561 [ 334 P.2d 881 ]; Lamb v. Belt Casualty Co. (1935) 3 Cal.App.2d 624 , 630-

There is no evidence of any breach of contract by defendant Bellefonte in these respects. It did not deny coverage and it did not refuse to defend plaintiff. On the contrary, in response to the letter of September 1 from plaintiffs attorney, the company expressly acknowledged that coverage existed. Denial of the claims was not based on lack of coverage but on the ground that the plaintiff was not legally liable to the automobile dealers.

In these circumstances, the standard “no action” clause precludes recovery by the insured of amounts paid to the claimants. (Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges A.G. (1970) 3 Cal.3d 434 , 449 [ 91 Cal.Rptr. 6 , 476 P.2d 406 ]; Greenville Shipbuilding Corp. v. Hartford Acc. & Ind. Co. (N.D.Miss 1971) 334 F.Supp. 1228 , 1236, affd. (5th Cir. 1972) 460 F.2d 1063 ; Rosenthal v. Security Insurance Group of New Haven (La.App.1967) 205 So.2d 816 ; Louisiana Farm Supply Co. v. Federal Mut. Ins. Co. (Mo.App.1966) 409 S.W.2d 239 , 242.)

Plaintiff treats the issue presented as if defendant Bellefonte were relying simply on breach of the cooperation clause, and argues that there was no proof of prejudice by the insurance company. (See Billington v. Interinsurance Exchange (1969) 71 Cal.2d 728 , 736-737 [ 79 Cal.Rptr. 326 , 456 P.2d 982 ].) It is true that voluntary payments by the insured may give rise to that defense. (See Diversified Mortg. Investors v. U.S. Life Ins. Co., supra, 544 F.2d 571 , 575; Dairyland Insurance Company v. Hughes (W.D.Va.1970) 317 F.Supp. 928 , 937; Star Transfer Co. v. Underwriters at Lloyds of London (1944) 323 Ill.App. 90 [ 55 N.E.2d 109 , 111-112].)

But the issue is more basic. The threshold question is whether or not the company has breached the contract in the first instance in view of the separate “no action” provision of the policy. In third party liability insurance, as here, the gist of the insurer’s indemnity undertaking is that it will indemnify the insured against legal liability

Willett’s Plumbing v. Northwestern Nat. Cas. (1977) 261 Ark. 447 [ 548 S.W.2d 830 , 831], adds: “The rule is that, absent a demonstration of bad faith, a liability insurer acts within its contract rights whenever it refuses to voluntarily settle a claim and insists there be an adjudication of the matter on its merits.”

The mere failure te reimburse the insured was not a breach of contract. Hence, the third count of the complaint did not state a cause of action in alleging such a breach “by refusing to pay Plaintiffs for losses sustained as a result of the theft of two automobiles from their premises.” Plaintiff failed to prove a cause of action for breach of contract in the respect alleged for the same reason. Accordingly, defendant Bellefonte was entitled to a directed verdict and to judgment notwithstanding the verdict on the third count.

We do not suggest that an insurer’s denial of a liability claim cannot constitute a breach of its duty to the insured under any and all circumstances. While the California cases have not considered the precise question, it has been recognized that an insurer may breach the covenant of good faith and fair dealing by means other than denial of coverage or refusing to defend or rejection of a reasonáble settlement offer. (See Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809 , 871 [ 157 Cal.Rptr. 482 , 598 P.2d 452 ], failure to properly investigate insured’s disability insurance claim.) Decisions in other jurisdictions indicate that an insurer’s conduct in denying or delaying action on a third party claim may render it liable for a settlement made by the insured where that conduct is arbitrary, capricious or without substantial sup

The fourth count of the complaint did not assert unreasonable delay in acting on the claims as a basis for the allegation of bad faith. Considering the circumstances, including the nature of the claims, the relatively minor amounts thereof and the times and distances involved, it is doubtful that any such contention could be sustained. In any event, the allegation was that: “Defendants have refused to accept or discuss settlement or to negotiate in good faith, and Defendants did not at any time make any offer of settlement to Plaintiffs.” In view of the duty imposed on plaintiff as a bailee for mutual benefit (see Windeler v. Scheers Jewelers (1970) 8 Cal.App.3d 844 , 850 [ 88 Cal.Rptr. 39 ]; Annot. (1966) 7 A.L.R.3d 927 , 935), including the burden of explaining the loss (see Vilner v. Crocker National Bank (1979) 89 Cal.App.3d 732 , 737-738 [ 152 Cal.Rptr. 850 ]; Annot.(1972) 43 A.L.R.3d 413 , 415; 9 Cal.Jur.3d, Bailments, § 43, p. 173), it is conceivable that the evidence could give rise to a question of fact as to whether or not Bellefonte acted in good, faith toward plaintiff in denying the claims or in maintaining that posture after being informed of plaintiff’s predicament with the dealers.

No opinion is expressed on that question inasmuch as its determination is unnecessary to the appeal. The bad faith theory of the fourth count was submitted to the jury under instructions stating that “An insurance company which fails to deal fairly and in good faith with its insured is subject to liability for all damages proximately resulting from such conduct” (BAJI No. 12.92, modified) and that “An insurance company’s obligation of good faith requires that before rejecting a claim it make an honest, intelligent and knowledgeable evaluation of the claim on its merits’ (BAJI No. 12.97, modified).