Hurvitz v. St. Paul Fire & Marine Insurance

Opinion

Appellants James S. Hurvitz, M.D., and his wife Jackie Hurvitz brought suit against respondent St. Paul Fire and Marine Insurance Company (St. Paul) for (1) bad faith breach of insurance contract based on St. Paul’s decision to settle a third party’s claims without the Hurvitzes’ consent and over their objections and (2) breach of oral settlement agreement. The trial court granted St. Paul’s motion for summary judgment, concluding that the Hurvitzes’ consent was not required and that no final settlement agreement had been consummated. We hold that where an insurance policy grants to the insurer the “right and duty” to defend any claim or suit for covered injury or damage, including claims and suits that are “groundless, false or fraudulent” and the “right to settle any claim or suit within the available limits of coverage,” the insurer need not obtain the insureds’ consent prior to settling with a third party even though it leads to the loss of the insureds’ potential claim for malicious prosecution, injures their reputation, or impacts their future insurability. We further agree with the trial court that no final settlement agreement was breached, and, therefore, affirm the judgment.

The following are the agreed facts as set forth in the parties’ briefs.

The Insurance Policy

Respondent St. Paul issued a professional office insurance policy package to Dr. Hurvitz effective from January 1, 1997, to January 1, 1998. The package included commercial general liability coverage for bodily injury, property damage, personal injury, and advertising injury. The policy had an advertising injury limit of $500,000. The “advertising injury liability” provision provided: “We’ll pay amounts any protected person is legally required to pay as damages for covered advertising injury that: results from the advertising of your products, work or completed work; and is caused by an advertising injury offense committed while this agreement is in effect.” The term “advertising” was defined to mean “attracting the attention of others by any means for the purpose of seeking customers or increasing sales or business.” The term “advertising injury” was defined to mean “injury, other than bodily injury or personal injury, caused by an advertising injury offense.” The term “advertising injury offense” was defined to mean “any of the following offenses: Libel or slander. Making known to any person or organization written or spoken material that belittles the products, work or completed work of others. Making known to any person or organization written or spoken material that violates an individual’s right of privacy. Unauthorized taking or use of any advertising idea, material, slogan, style or title of others.”

The provision governing the “[rjight and duty to defend” provided: “We’ll have the right and duty to defend any claim or suit for covered injury or damage made or brought against any protected person. We’ll do so even if any of the allegations of any such claim or suit are groundless, false or fraudulent. But we have no duty to perform other acts or services. And our duty to defend claims or suits ends when we have used up the limits of coverage that apply with the payment of judgments, settlements or medical expenses, [f] We’ll have the right to investigate any claim or suit to the extent that we believe is proper. We’ll also have the right to settle any claim or suit within the available limits of coverage.”

The Hurvitz/Hoefflin Litigation

Appellant Dr. Hurvitz was formerly in business with Dr. Steven Hoefflin. In 1996, Dr. Hurvitz filed suit against Dr. Hoefflin (Hurvitz v. Hoefflin (Super. Ct. L.A. County, No. SC043313)) (No. 313). While that case was

With regard to the cause of action for breach of settlement agreement, the court stated: “The undisputed facts show that [St. Paul] did not agree to [the terms contained in the January 8, 2000, letter] and that the [Hurvitzes] themselves had no knowledge of and certainly did not agree to the settlement terms they are seeking to enforce. The letters presented by [the Hurvitzes] show that there was no ‘meetings of the minds’ regarding the terms of any oral contract. [|] [The Hurvitzes have] presented no material disputed facts that would demonstrate that there was a meeting of the minds. Further, it was the clear intention of the parties that the agreement would be in writing before it could be considered completed.” Judgment was entered on the court’s order, and this appeal followed.

Discussion

The Hurvitzes contend that St. Paul wrongfully settled with Dr. Hoefflin over their objection, particularly with regard to No. 602, the case it consistently refused to defend, and the claims asserted against Mrs. Hurvitz since she sent a letter purporting to withdraw her tender of defense.

Preliminarily, we look at whether an indemnitor’s settlement of a lawsuit without the consent or participation of the indemnitee does, in fact, bar a later claim for malicious prosecution by the indemnitee—the primary injury purportedly suffered by the Hurvitzes. That was the issue in Villa v. Cole (1992) 4 Cal.App.4th 1327 [ 6 Cal.Rptr.2d 644 ], a case involving a suit against several Alameda police officers and the City of Alameda (City) brought by a man who had been arrested for drunk and disorderly conduct. The officers were sued both in their official capacities and their individual capacities, and were represented by the City’s attorney. The City was bearing all the cost of defense and would have been obligated to pay any

In reviewing the trial court’s order, the appellate court discussed the basic principles of malicious prosecution law: “[I]n order to establish a cause of action for malicious prosecution a plaintiff must plead and prove that the prior proceeding . . . was: (1) pursued to a legal termination favorable to the plaintiff; (2) brought without probable cause; and (3) initiated with malice. [Citations.] ... [|] In order for the termination of the lawsuit to be considered ‘favorable’ to the malicious prosecution plaintiff, it must be reflective of the merits of the action and of the plaintiff’s innocence of the misconduct alleged therein. In most cases, a voluntary unilateral dismissal is considered a termination in favor of the defendant in the underlying action; the same is true of a dismissal for failure to prosecute. [Citations.] [1] On the other hand, a resolution of the underlying litigation that leaves some doubt as to the defendant’s innocence or liability is not a favorable termination, and bars that party from bringing a malicious prosecution action against the underlying plaintiff. Thus, a dismissal resulting from negotiation, settlement or agreement is generally not deemed a favorable termination of the proceedings. [Citations.] The purpose of a settlement is to avoid a determination on the merits.” (Villa v. Cole, supra, 4 Cal.App.4th at pp. 1335-1336.)

The officer contended that because the underlying lawsuit was settled over his protests and objection and because he did not participate in the settlement in any way, it “actually operated as a voluntary unilateral dismissal of himself by [the arrestee], and was thus a favorable termination on the merits.” (Villa v. Cole, supra, 4 Cal.App.4th at p. 1336.) The court disagreed: “[E]ven where a defendant does not agree to a settlement made on his behalf, his or her dismissal from the lawsuit pursuant to that settlement will not be viewed as a favorable termination as long as it was a necessary condition to achievement of the overall settlement. Such a dismissal is not considered unilateral because it was required by the terms of a settlement agreement, and it will act as a bar to a later malicious prosecution action by the nonsettling defendant.” (Ibid) In the case before it, “the terms of the

In reaching its decision, the court relied in part on Haight v. Handweiler (1988) 199 Cal.App.3d 85 [ 244 Cal.Rptr. 488 ]. In that case, a malicious prosecution action based on an underlying malicious prosecution action, the attorney defendant in the underlying malicious prosecution refused to settle unless the plaintiff also dismissed his former client. The settlement went forward and both were dismissed, but neither the client nor his new attorney agreed to the settlement or authorized the dismissal. Like the officer in Villa v. Cole, supra, 4 Cal.App.4th 1327 , the client argued that “because he did not agree to the settlement the termination should be treated as a voluntary dismissal of him . . . .” (Haight v. Handweiler, supra, 199 Cal.App.3d at p. 89.) The facts were undisputed, however, that the plaintiff in the underlying malicious prosecution action “dismissed [the client] because it was necessary to effect the settlement, . . . because [the former attorney] would not settle without it . . . .” (Ibid) The plaintiff in the underlying malicious prosecution action also believed that the settlement funds represented reasonable compensation for the damage he suffered in the original litigation. On those facts, the court agreed that the dismissal of the client “does not qualify as a favorable termination in the context of a malicious prosecution action.” (Ibid.)

Based on Villa v. Cole and Haight v. Handweiler, it appears that the Hurvitzes are correct that the settlement, despite their lack of involvement and outright opposition, deprived them of the favorable termination needed to pursue a later malicious prosecution action against Dr. Hoefflin.

As we have seen, the insurance policy gave St. Paul “the right and duty to defend any claim or suit for covered injury or damage made or brought against any protected person[] . . . even if any of the allegations of any such

Similar allegations were before the court in Western Polymer Technology, Inc. v. Reliance Ins. Co. (1995) 32 Cal.App.4th 14 [ 38 Cal.Rptr.2d 78 ], where the plaintiffs, a company and its owner, alleged that the settlement of a third party claim by their insurer “injured their reputations and damaged [plaintiff company’s] ability to recover on its cross-complaint against the third parties.” (Id. at p. 18.) The plaintiff company had been sued by a third party for allegedly delivering defective manufacturing equipment, and had cross-claimed for amounts due under a note and for misrepresentation. After expending over $500,000 in defense costs, the insurer settled within policy limits under an agreement that left the cross-claims intact. Putting a reverse spin on the numerous cases which have held that an insurer acts in bad faith when it unreasonably refuses to settle a case within policy limits and thus exposes its insured to a judgment far beyond policy limits, the plaintiffs argued that an insurer engages in bad faith conduct when it accepts a settlement over the insured’s objection where there is no likelihood that the insured would be exposed to a judgment that exceeded the policy’s limits. (Id. at p. 23.)

The court refused to “accept [the plaintiffs’] indiscriminate transfer of rules that address one problem—insurers which wrongfully expose their insureds to excess liability by unreasonably refusing settlements—to a context completely foreign to the rules’ origins.” (Western Polymer Technology, Inc. v. Reliance Ins. Co., supra, 32 Cal.App.4th at p. 23.) Instead, it “use[d] fundamental principles that govern claimed breaches of the implied covenant of good faith and fair dealing” to analyze plaintiffs’ claim. (Ibid.) Under this analysis, it was clear that the interests plaintiffs claimed were impaired could not be protected by the implied covenant of good faith and fair dealing, given the purpose of liability insurance and the express language of the policy: “[Plaintiff company] contends that the settlement injured its business reputation. However, a liability insurance policy’s purpose is to provide the

We find further support for our conclusion in New Plumbing Contractors, Inc. v. Edwards, Sooy & Byron (2002) 99 Cal.App.4th 799 [ 121 Cal.Rptr.2d 472 ], where the insured sued not its insurer, but the insurer’s counsel, alleging professional negligence and breach of fiduciary duty for settling an earlier action without notifying the insured and “ignoring valid defenses that would have absolved [the insured] of any liability.” (Id. at p. 801.) The damages were said to be “higher premiums, . . . lower coverage and higher deductibles,” as well as the need to deal with “financially weaker carriers . . . .” (Ibid.) The trial court ruled that “the insurer had the right to settle the case regardless of whether it was defensible, and without consulting its insured.” (Id. at pp. 801-802.) The appellate court agreed: “Under a policy provision giving an insurance company discretion to settle as it sees fit, the insurer is ‘entitled to control settlement negotiations without interference from the insured,’ and generally, it has no liability to the insured for settling within the policy limits. [Citation.] Thus, there is no cause of action where the insured claims the settlement injured its business reputation [citation], nor any where the insured claims the settlement unfairly used up its deductibles. [Citation.] ... [10 Since [the insurer] could settle without consulting [the insured] and over its objection, counsel’s recommendation of settlement was not a cause of any harm the [insured] may have suffered.” (Id. at p. 802.)

The Hurvitzes cite a case with similar facts that came to a dissimilar conclusion: Novak v. Low, Ball & Lynch (1999) 77 Cal.App.4th 278 [ 91 Cal.Rptr.2d 453 ]. There the insurer agreed to defend two of the multiple causes of action in a third party complaint under a reservation of rights. Independent counsel was appointed to provide the insured a defense. In the meantime, unbeknownst to the insured or his independent counsel, counsel

The court gave various examples of ways the insured could have acted to protect himself had he been properly informed, which “[bore] on the factual issues of causation and damages, which remain for determination at trial”: “[He] could have attempted to finish discovery prior to settlement, effect a global settlement of the entire action or seek declaratory relief as to whether [the insurer] could withdraw its defense upon a partial settlement. [The insured] has also asserted various ways in which the settlement worked more harm than good, including loss of insurance protection and defense to the remaining causes of action. As well, the settlement provided [the third party] with financing to aggressively prosecute the remaining causes of action. Further, [the insured] contends the first two causes of action were completely devoid of merit, and thus their dismissal precluded pursuit of a suit for malicious prosecution as to those claims.” (Novak v. Low, Ball & Lynch, supra, 77 Cal.App.4th at p. 285.)

In Novak, the harm to the insured arose primarily from the failure to negotiate a global settlement that included dismissal of all causes of action against the insured, something that did not occur here. However, to the extent it is supportive of the view that, prior to acceptance of a reasonable settlement within policy limits, an insurer or its counsel must consider the impact of a settlement on an insured’s potential claim for malicious prosecution or on the third party’s ability to finance continuing litigation, we must respectfully disagree for the reasons we have discussed and the reasons set forth in Western Polymer and New Plumbing Contractors.

As the Hurvitzes further point out, in other circumstances, courts have held that settlements which eliminate the insureds’ rights to obtain recovery for their affirmative claims of injury can result in liability for bad faith. In two cases—Barney v. Aetna Casualty & Surety Co. (1986) 185 Cal.App.3d 966 [ 230 Cal.Rptr. 215 ], and Rothtrock v. Ohio Farmers Ins. Co. (1965) 233

The Hurvitzes also-seek to rely on this court’s decision in Notrica v. State Comp. Ins. Fund (1999) 70 Cal.App.4th 911 [ 83 Cal.Rptr.2d 89 ] for the proposition that the insurer must at least consider the potential impact on the insured’s future premiums when it settles a third party lawsuit. In that case, a business sued its workers’ compensation cárrier, the State Compensation Insurance Fund, for tort recovery based on the insurer’s case reserve and claims handling policies and practices. The insurer had a pattern of leaving claims open for excessive periods of time and assigning high monetary reserves to account for their future resolution, thus causing the insured’s experience based premiums to be inflated. We followed the decision in Security Officers Service, Inc. v. State Compensation Ins. Fund (1993) 17 Cal.App.4th 887 [ 21 Cal.Rptr.2d 653 ], in holding that this practice violated the implied covenant of good faith and fair dealing. In Security Officers Service, the plaintiff established that claims which had been open for as long as three years, and to which reserves in excess of $100,000 had been assigned, could have been easily resolved for a fraction of the reserve amount. (Id. at p. 891.) The insurer argued that a finding that the implied covenant applied in that situation would improperly conflict with its liability to claimants “because [it] would be forced to attune its efforts toward minimizing plaintiff’s premiums, as opposed to proper claims determination and payment.” (Id. at p. 898.) The court in Security Officers Service found this conflict to be “a false one”—and we agreed—because “[f]rom the standpoint of diligence and proper reserve-setting, the interests of both [the insured and the claimant] are identical.” (Ibid.)

The situation here is not at all analogous to that in Notrica and Security Officers Service. Unlike the plaintiffs in those cases, the Hurvitzes did not

One difficulty with the Hurvitzes’ attempt to isolate No. 602 as the basis for bad faith actions by St. Paul is that the complaint in that case was never served on them. Consequently, they suffered no appreciable damage as the result of St. Paul’s refusal of tender. Moreover, since Dr. Hoefflin’s claims against the Hurvitzes all arose out of the same general set of facts, we do not see how St. Paul could have effectively settled the other three lawsuits in a way that fulfilled their good faith obligation to fully protect the Hurvitzes without resolving No. 602. Even if No. 602 had not been specifically mentioned in the settlement agreement, the general release obtained would have ultimately required Dr. Hoefflin to dismiss the Hurvitzes from the case.

More significantly, in asserting St. Paul’s “wrongful” settlement of No. 602 as a basis for the underlying bad faith lawsuit, the Hurvitzes overlook that they obtained substantial benefit from the settlement, including a determination under Code of Civil Procedure section 877.6 that the other codefendants in No. 602 could not pursue cross-claims for indemnity. At the section 877.6 hearing, the Hurvitzes did not join the other defendants in contending that St. Paul lacked standing. Instead, they admitted that they desired the protection afforded by the finding that a good faith settlement had been consummated on their behalf. Their objection was based solely on a desire to put off the good faith determination for fear that it would undermine the present bad faith action.

A similar attempt to disavow the burden of an inconvenient settlement while at the same time accept the benefits was before the court in Villa v. Cole, supra, 4 Cal.App.4th 1327 . The plaintiff police officer, in seeking to pursue a malicious prosecution action against the arrestee despite the City’s purported settlement of the entire underlying action, asserted that “the City could not settle on his behalf and could not claim to represent him because

The situation was somewhat the same in New Hampshire Ins. Co. v. Ridout Roofing Co., supra, 68 Cal.App.4th 495 , where the insured tendered defense of multiple claims to its insurer and allowed the insurer to pay all the expenses of the litigation, but balked at paying the policy’s deductible of $5,000 per occurrence after the claims were settled. In a lawsuit brought by the insurer to recover reimbursement for the deductible, the insured argued, among other things, that the losses were not covered “property damage” losses under the policy. (Id. at p. 501.) The court stated: “If, subsequent to its tenders to the insurer and the commencement of the latter’s provision of a defense, this insured concluded that, notwithstanding its tender(s), some or all of these claims were in fact not covered by the policy, it could have, among other things (1) so stated via a letter to the insurer and requested the transfer of the defense to its own counsel, (2) so stated in court and requested a substitution of counsel on that basis, (3) filed a declaratory relief action asking for a determination that there was no coverage, etc. What it cannot do, however, is have the best of both worlds, i.e., accept the benefits of the defense provided by the insurer but, when the time comes to effect settlements of the claims (via, in part, its deductibles), then assert a lack of coverage.” (Id. at p. 507.)

The Hurvitzes likewise seek to have it both ways with regards to No. 602. To the extent any defense in No. 602 was required, it was funded by St. Paul.

The judgment is affirmed.

Vogel (C. S.), P. J., and Hastings, J., concurred.