Risely v. Interinsurance Exchange of Automobile Club

Opinion

I

NTRODUCTION

The trial court granted an insurer’s motion for summary judgment on the ground that, as a matter of law, the insurer’s refusal to defend and indemnify its insured against an injured party’s claim of false imprisonment had not caused the insured to suffer any damages. The trial court concluded that the insurer’s refusal to defend the claim under a homeowners policy was “of no consequence” to the insured because the insurer provided the insured a defense pursuant to a separate automobile policy.

We conclude that the mere fact that the insurer provided its insured with a defense under one policy does not necessarily insulate the insurer from liability for its alleged breach of the duty to defend and settle under a second policy. In this case, the insurer has not established that its refusal to defend under the homeowners policy was of “no consequence” to the insured, as the trial court found. On the contrary, the insurer’s refusal to defend under the homeowners policy potentially increased the insured’s exposure to personal liability. The trial court therefore erred in concluding that, as a matter of law, the insured suffered no damages from the insurer’s refusal to defend. Accordingly, we reverse the judgment.

n.

FACTUAL AND PROCEDURAL BACKGROUND

A. Risely’s complaint

In May 2008, Lisa Risely filed a three-count third amended complaint against Interinsurance Exchange of the Automobile Club (Auto Club), in which she claimed breach of contract and breach of the covenant of good faith and fair dealing, and sought to recover the proceeds of an insurance policy as a judgment creditor, pursuant to Insurance Code section 11580.^[1] The complaint alleged that on or about August 6, 2003, Auto Club’s insured,

Sean Turner, offered Risely a ride home in his car. After Risely got into the car, Turner began to drive erratically and negligently. Risely asked Turner to take her home immediately several times, but he refused to do so. Risely also asked Turner to stop driving erratically, but he refused this request, as well. Risely alleged that Turner wrongfully held her against her will, and that she suffered severe, debilitating injuries as a result of his conduct.^[2]

Risely also alleged that Turner was insured under two insurance policies issued by Auto Club—an automobile policy with policy limits of $50,000, and a homeowners policy with policy limits of $300,000. Risely further alleged that the homeowners policy provided coverage for personal injury arising from false imprisonment, and that the automobile policy did not provide such coverage. Risely also claimed that the homeowners policy provided that Auto Club would defend any suit seeking covered damages, and that this policy contained an implied covenant that Auto Club would “settle liability matters at or within policy limits.”

Risely alleged that in August 2005, she filed a lawsuit against Turner for motor vehicle negligence, negligence per se, and false imprisonment, among other claims. Auto Club provided Turner with counsel to defend the action. In December 2005, Risely offered to settle the action against Turner for $300,000—the policy limits of the homeowners policy. In January 2006, Auto Club, through its coverage counsel, sent a letter to Turner declining to defend or indemnify him under the homeowners policy,^[3] and stating that Auto Club would defend all of Risely’s claims under Turner’s automobile policy, including the false imprisonment claim. Auto Club subsequently declined Risely’s $300,000 demand on the ground that the demand was in excess of the policy limits of the automobile policy, and there was no other applicable coverage.

In her complaint against Auto Club, Risely alleged that after Auto Club declined to defend or indemnify Turner under the homeowners policy, Turner agreed to the entry of a stipulated judgment against him in Risely’s lawsuit. Turner also agreed to assign to Risely any and all claims that Turner might have against Auto Club for breach of contract and breach of the covenant of good faith and fair dealing, based on Auto Club’s refusal to defend or

indemnify Turner under the homeowners policy. In September 2006, pursuant to the stipulation, the trial court entered a final judgment in the amount of $434,000 in Risely’s lawsuit against Turner, on her false imprisonment claim.^[4] Risely alleged in this lawsuit that Auto Club repeatedly refused her requests to pay the judgment.

In her first cause of action for breach of contract, Risely claimed that Auto Club breached its duty to defend and indemnify Turner against Risely’s false imprisonment claim. Risely further alleged that Auto Club breached its duty to accept her reasonable settlement offer, thereby exposing Turner to the possibility that he would incur personal liability, despite the fact that Risely’s claim was covered under the homeowners policy. Risely alleged that Auto Club’s breaches caused Turner to enter into a stipulated judgment against him for $434,000, and that she was entitled to recover $434,000 from Auto Club, since Turner had assigned to her his breach of contract claim against Auto Club. Risely repeated these allegations in her claim for breach of the covenant of good faith and fair dealing.

In a third cause of action, Risely alleged that upon the entry of judgment in her action against Turner, she became a third party beneficiary of Turner’s homeowners policy with Auto Club, pursuant to section 11580. Risely alleged that she was entitled to recover the $300,000 policy limits, as well as punitive damages, pursuant to this claim.

B. Auto Club’s motion for summary judgment

Auto Club filed a motion for summary judgment and/or adjudication in which it claimed that Risely could not establish any of her claims because a “judicial determination of liability in the underlying case sufficient to establish damages resulting from a refusal to settle,” was an essential element of each of Risely’s claims, and there had been no such determination. Auto Club contended that, as a matter of law, the stipulated judgment entered in the underlying action was not binding against it because Auto Club had provided a defense to all of Risely’s claims in that action. Auto Club did not dispute that it had refused to defend or indemnify Turner under the homeowners policy, but maintained that it had fulfilled its duty to defend Turner by providing him a defense under the automobile policy.

Auto Club acknowledged that, “[wjhere an insurer refuses to defend its insured against a third party claim, the insured may enter a noncollusive

Risely maintained that Auto Club had forfeited its right to assert the “no action” provision of the policy by declining to defend or indemnify Turner under that policy.^[5]

Risely distinguished Hamilton, and several other similar cases on which Auto Club relied in its motion, noting that in all of those cases, the insurer had fully defended the claim under the policy at risk, and thus, that no breach of the duty to defend was at issue. Risely argued that the present case was distinguishable from the cases that Auto Club cited because Auto Club had breached both its duty to defend and its duty to settle under the homeowners policy.

Risely distinguished Ceresino on the ground that in that case, there had been a prior judicial determination that the nondefending insurer’s policy did not cover the claim, while in this case, there had been no judicial determination that Risely’s false imprisonment claim was not covered under the homeowners policy. Risely further noted that the Ceresino court had suggested that an insurer may be bound by a stipulated judgment for a covered claim where the insurer breaches its duty to defend, notwithstanding the fact that another insurer defended the claim.

Risely contended that the fact that Auto Club had defended Turner against the false imprisonment claim under the automobile policy did not excuse its failure to defend him under the homeowners policy. Noting that the automobile policy had policy limits of $25,000 per person and $50,000 per occurrence, and did not include coverage for false imprisonment, while the homeowners policy had a $300,000 policy limit and provided coverage for false imprisonment, Risely maintained that Auto Club’s defense of her false imprisonment claim under the automobile policy was not equivalent to a defense under the homeowners policy because, “[t]he defense provided under the automobile policy exposed [Auto Club] to absolutely no liability for any claim, settlement and/or judgment for the false imprisonment claim, while leaving its insured liable for a covered risk under the homeowner’s policy.”^[6]

D. The judgment and appeal

The trial court entered judgment in favor of Auto Club. Risely filed a motion for new trial and/or to vacate or set aside the judgment. The trial court denied both motions. Risely timely appeals.

HI.

DISCUSSION

Auto Club was not entitled to summary judgment^[7]

A. Governing law

1. The law governing summary judgment

A moving party is entitled to summary judgment when the party establishes that it is entitled to the entry of judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) A defendant may make this showing by establishing that the plaintiff cannot establish one or more elements of all of his causes of action, or that the defendant has a complete defense to each cause of action. (Towns v. Davidson (2007) 147 Cal.App.4th 461 , 466 [ 54 Cal.Rptr.3d 568 ].)

In reviewing a trial court’s ruling on a motion for summary judgment, the reviewing court makes “ ‘an independent assessment of the correctness of the trial court’s ruling, applying the same legal standard as the trial court in determining whether there are any genuine issues of material fact or whether the moving party is entitled to judgment as a matter of law. [Citations.]’ ” (Trap v. Sony Pictures Entertainment, Inc. (2005) 129 Cal.App.4th 1133 , 1143 [ 29 Cal.Rptr.3d 144 ], quoting Iverson v. Muroc Unified School Dist. (1995) 32 Cal.App.4th 218 , 222-223 [ 38 Cal.Rptr.2d 35 ].)

2. The duties that an insurer owes to its insured

A liability insurer has a duty to defend its insured against third party claims that are potentially within the scope of the insured’s policy, and also has a duty to defend any noncovered claims that are asserted in the same action. (Buss v. Superior Court (1997) 16 Cal.4th 35 , 46-48 [ 65 Cal.Rptr.2d

failed to defend and indemnify Ceresino in a tort suit brought by an injured party (McCulloch). A second insurer (Commercial Union) had provided Ceresino a defense in the tort suit, which was ultimately resolved by way of a stipulated judgment in favor of McCulloch. (Id. at p. 817.) In a separate declaratory relief action, the trial court determined that Farmers had no duty to indemnify Ceresino in the McCulloch tort suit. (Id. at pp. 822-823.) In Ceresino’s suit against Farmers, the trial court rejected Ceresino’s claim that Farmers was bound by the stipulated judgment entered in the underlying tort action, and entered a judgment in favor of Farmers.^[8] (215 Cal.App.3d at p. 819.)

On appeal, Ceresino claimed that the trial court had erred in concluding that Farmers was not bound by the stipulated judgment in the McCulloch tort suit. The Ceresino court rejected this claim. The court first noted, “[T]he stipulation in the third party McCulloch/Ceresino action might bind Farmers for failure to defend if there is coverage.” (Ceresino, supra, 215 Cal.App.3d at p. 822.) However, the court concluded that Ceresino was bound by the trial court’s determination in the declaratory relief action that Farmers had no duty to indemnify Ceresino in the McCulloch tort suit. (Ibid.) With respect to damages potentially flowing from Farmers’s alleged breach of the duty to defend, the court stated, “Farmers’ failure to defend was of no consequence except to Commercial Union, which requested Farmers pay for half of the defense. . . .” (Id. at p. 823.) The Ceresino court concluded that the trial court had properly granted judgment in favor of Farmers.

B. Application

Risely claims that the trial court erred in granting Auto Club’s motion for summary judgment on the basis of the Supreme Court’s reasoning in Hamilton. Citing Wint, Risely claims that Auto Club’s defense of Turner under the automobile policy did not excuse its refusal to defend him under the homeowners policy, and that trial court erred in concluding that, as a matter of law, Auto Club could not be bound by the stipulated judgment. We agree.^[9]

The Hamilton court recognized and endorsed prior case law in which courts had determined that a stipulated judgment entered after an insurer

breached its duty to defend was enforceable. (Hamilton, supra, 27 Cal.4th at p. 728.) In this case, Risely alleged that Auto Club breached its duty, under the homeowners policy, to defend Turner against Risely’s false imprisonment claim. In its motion for summary judgment, Auto Club did not attempt to establish that it had not breached its duty to defend.^[10] Risely’s claim is thus fully consistent with Hamilton in this regard.

Auto Club contends that Turner could not have suffered any damages, as a matter of law, from Auto Club’s alleged breach of its duty to defend because Auto Club provided Turner a defense under a separate policy. However, the situation in this case differs from that in Hamilton because in Hamilton, the insurer accepted its defense obligations under all relevant policies. (Hamilton, supra, 27 Cal.4th at pp. 722-723.) The Hamilton court thus did not have occasion to consider the issue in this case, i.e., whether an insured can establish damages stemming from an insurer’s breach of its duty to defend where the insured is owed a duty to defend under more than one policy. Hamilton is not therefore controlling on this issue.

Auto Club contends that it is a “defending insurer” under Hamilton, supra, 27 Cal.4th at page 722, because it defended Turner under the automobile policy. In making this assertion, Auto Club fails to acknowledge that a defense under one insurance policy does not constitute a defense under a different insurance policy. Each separate insurance policy carries with it a duty to defend. Here, it is undisputed that Auto Club not only denied coverage under the homeowners policy, but also declined to defend Turner under that policy.

Citing Ceresino, supra, 215 Cal.App.3d at page 823, Auto Club also contends that, “Where there is a duty to defend, a failure to defend under one policy is of no consequence where a defense is being provided under another policy.” Ceresino does not stand for this broad proposition. On the contrary, the Ceresino court acknowledged that a stipulated judgment may in fact bind an insurer that has breached its duty to defend covered claims. (Id. at p. 822.) However, the Ceresino court concluded that the insured in that case could not establish damages by way of a stipulated judgment, in part because the nondefending insurer had previously obtained a ruling that the claims at issue were not covered under the policy in question. (Id. at pp. 822-823.) In this case, in contrast, there has been no determination that Risely’s false imprisonment claim is not covered under the homeowners policy.

170 Cal.App.4th at p. 1005.) Further, in Wint, the Supreme Court held that a nondefending insurer could be bound by a stipulated judgment that its insured entered into after the insurer breached its duty to defend, notwithstanding that another insurer had provided a defense to the action. (Wint, supra, 9 Cal.3d at p. 263.)

We reject Auto Club’s argument that the Wint court’s statement “regarding the inequality of a defense provided under a policy with a lower limit” is not authority for that proposition. Auto Club claims that this statement was “pure dictum,” and that it was “overridden” by Hamilton. On the contrary, in our view, this statement forms the basis of the Wint court’s holding, and, as discussed previously, the Hamilton court did not consider this issue. (See also Safeco, supra, 170 Cal.App.4th at p. 1005 [relying on this aspect of Wint in a case decided after Hamilton).) Auto Club offers no reasonable basis for distinguishing Wint, nor does it offer any rationale for extending Hamilton to a scenario that was not contemplated by that court.

As noted above, Auto Club maintains that its alleged wrongful refusal to defend Turner against Risely’s false imprisonment claim under Turner’s homeowners policy was “of no consequence.” Specifically, Auto Club contends that because it provided a “full and complete defense” to the claim under the automobile policy, Turner was not damaged by its refusal to defend under the homeowners policy.^[11]

Although there appears to be no prior case in which a court has considered whether an insured may establish damages based on an insurer’s alleged breach of its duty to defend where a single insurer is alleged to owe a duty to defend under more than one policy, Auto Club offers no reason why the law should differ depending on whether the policies in question are issued by a single insurer, or instead, by multiple insurers. If, in this case, Auto Club had issued only the homeowners policy and refused to defend, and a different insurer had issued the automobile policy and defended, Auto Club would not be in a position to argue, as it does here, that its refusal to defend under the homeowners policy was, as a matter of law, “of no consequence” to the insured. Rather, under that scenario, Auto Club would be in the same position as the nondefending insurer was in Wint, in which the court unequivocally rejected Fidelity’s argument that a defense by Great American, an insurer whose policy had a limit below the amount claimed, was equivalent to a defense by Fidelity, whose policy limit was 10 times higher than the Great American policy limit.

Since there has been no judicial determination in this case as to whether the homeowners policy provided indemnity coverage for Risely’s false imprisonment claim, it is clear that Auto Club has not established as a matter of law that Turner was not damaged by its failure to provide a defense under that policy. To the extent that the homeowners policy provided indemnity coverage for Risely’s false imprisonment claim, Auto Club’s alleged wrongful failure to defend under that policy denied Turner his right to have Auto Club accept a reasonable settlement demand of the claim within the policy limits of the homeowners policy.^[12] (See Hamilton, supra, 27 Cal.4th at p. 724 [“From the covenant of good faith and fair dealing implied by law in all contracts, and from the liability insurer’s duty to defend and indemnify covered claims, California courts have derived an implied duty on the part of the insurer to accept reasonable settlement demands on such claims within the policy limits.”].) Assuming that the homeowners policy does provide indemnity coverage for Risely’s false imprisonment claim, it is clear that Auto Club’s refusal to defend Turner under the homeowners policy, and its choice to defend him under only the automobile policy—which provided no coverage for Risely’s claim—would have exposed Turner to a greater potential for personal liability. Auto Club thus has not established that Turner was not damaged by its failure to provide a defense under the homeowners policy.

We need not decide in this appeal the more difficult question of whether Risely can establish that Turner suffered damages from Auto Club’s alleged breach of the duty to defend even if the homeowners policy does not provide indemnity coverage for Risely’s false imprisonment claim. Since the basis of the trial court’s grant of summary judgment was its determination that, as a matter of law, Risely cannot establish damages, our conclusion that Auto Club has not in fact made that showing, requires reversal. (Code Civ. Proc., § 437c, subd. (p)(2) [defendant meets its “burden of showing that a cause of action has no merit if that party has shown that one or more elements of the cause of action, even if not separately pleaded, cannot be established”].)

Finally, Auto Club claims that “[Risely’s] judgment creditor cause of action is precluded for the same reasons.” However, because Auto Club has not established that its alleged breach of its duty to defend Turner under the homeowners policy was excused by the fact that it provided him a defense under the automobile policy, Auto Club has not established that it cannot be bound by the stipulated judgment based on the “no action” clause in that policy. (See, e.g., Diamond Heights, supra, 227 Cal.App.3d at p. 581 [insurer that breaches duty to defend may be bound by stipulated judgment notwithstanding no action clause].)