Camelot By Bay Condominium Owners' Ass'n v. Scottsdale Insurance

Opinion

Scottsdale Insurance Company (Scottsdale) appeals a judgment for damages and attorney fees and costs in the amount of $626,513.74 entered against it after court trial in an action by Camelot by the Bay Condominium Owners’ Association, Inc. (Camelot). Camelot brought this action for damages for breach of the covenant of good faith and fair dealing as assignee of a policyholder of Scottsdale, the developer of Camelot’s premises, Breihan Development, Inc. (Breihan). Camelot cross-appeals the judgment insofar as it represents a reduction by 30 percent of the damages awarded in Camelot’s favor, representing Breihan’s comparative fault. All of these claims arise out of an underlying action between Camelot and Breihan for construction defects (Camelot by the Bay v. Breihan Development, Inc. (Super. Ct. San Diego County, 1989, No. 610814), the underlying action), in which Breihan agreed with Camelot to have a stipulated judgment in the amount of $675,000 entered against it in exchange for a covenant not to execute, coupled with an assignment of Breihan’s rights against Scottsdale to Camelot.

Scottsdale’s first group of arguments is dispositive of this appeal, and we need not reach the further issues raised concerning the binding effect of the stipulated judgment reached in this instance, nor concerning the application of comparative bad faith to these facts. Under Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 [ 328 P.2d 198 , 68 A.L.R.2d 883 ] (Comunale) and its progeny, an insurer’s refusal to settle a claim under its policy is unwarranted and a breach of the implied covenant of good faith and fair dealing in the policy “[w]hen there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, . . .” (Id. at p. 659, italics added.) The “reasonableness” of an insurer’s disposition of the claim is measured chiefly in relation to the estimated risk of the claimant’s recovery beyond the policy limits. Here, the insurance policy monetary limits were $1 million, and Camelot’s potential claim was never greater than $937,245. Camelot sought to settle the underlying action for construction defects for $300,000 and, after Scottsdale declined to settle the case for that amount, Camelot and Breihan reached the agreement for the stipulated judgment for $675,000. However, Breihan was never exposed to a potential excess verdict over its policy limits, and there was thus no risk of recovery beyond those policy limits to require Scottsdale, as a reasonable or prudent insurer, to dispose of the claim by settling within the policy limits.

Moreover, we conclude the trial court erred in equating the noncovered defects at the construction project with the defects which were clearly

In August and September 1990, retained defense counsel Ryan informed Scottsdale that in her opinion Camelot’s claim was higher than any eventual jury award, but a judgment in the construction defect case would probably exceed $300,000. She thus requested Scottsdale, more than once, to grant settlement authority in the amount of $300,000. Scottsdale refused, seeking additional information concerning manifestation dates and consequential damages. At that time, Camelot was demanding $300,000 to settle the dispute. Its $850,000 cost of repair estimate included both covered and noncovered items. Camelot obtained settlements with various subcontractors amounting to approximately $78,000.

As of the September 13, 1990, settlement conference date, Camelot’s settlement demand was $300,000, and Scottsdale’s own attorney, William Nebeker, was authorized to make a settlement offer of $75,000, up from the $35,000 previously offered. At the same time, Scottsdale was claiming it would not pay a penny in coverage or settlement, citing an alienated premises exclusion as the rationale for its settlement posture. The settlement judge, Judge Milliken, urged settlement in the range of $300,000 and advised Scottsdale that if it continued to reject the $300,000 offer, he anticipated that Breihan would assign its rights against Scottsdale and stipulate to a judgment against itself.

The settlement conference was continued to September 24, 1990. No Scottsdale representatives appeared except for Attorney Nebeker, who was given $90,000 settlement authority, based on defense cost of repair estimates of $90,000 (not including certain repair costs such as fog coating, retaining wall repairs, and past investigatory and repair expenses). Scottsdale relied partially on the alienated premises exclusion in the policy for rejecting the

The trial court then made factual findings that both Breihan and Scottsdale had placed their own respective interests substantially superior to that of the other, and had not considered settling the case and litigating coverage disputes at a later time. The trial court then found that based on what the parties knew as of September 24, 1990, $300,000 was a reasonable settlement figure in the case, taking into account liability, damage, cost of litigation, and coverage issues. The court noted that immediately after the settlement conferences, Camelot and Breihan had entered into the $675,000 stipulated judgment and assignment agreement, with a covenant not to execute on the judgment. A finding of fact was made that Scottsdale was not aware of this transaction until October 1, 1990, and was not given notice by Breihan of its intent to enter into the transaction. Breihan’s retained counsel had signed the stipulation and the judgment. The stipulated judgment was not subjected to any type of judicial scrutiny.

The trial court then made a further factual finding that based on the evidence presented to it, the amount of the stipulated judgment was not unreasonable. The court found the stipulated judgment was supported by actual evidence and represented about 75 percent of the amount Camelot was prepared to present against Breihan if the case had gone to trial. In a footnote, the court observed that liability in the underlying action was fairly

The court then set forth eight instances in which Scottsdale had breached the covenant of good faith and fair dealing in that it:

“- Refused to attempt to reasonably negotiate settlement of the case on its insured’s behalf;

Failed to provide retained defense counsel authorization to settle on its in[s]ured’s behalf;

Repeatedly rejected the advice of retained counsel, who repeatedly recommended settlement in the range of $300,000;

Repeatedly rejected plaintiff’s reasonable settlement demand of $300,000;

Repeatedly failed to give as much consideration to the interests of its insured as its own in conducting settlement negotiations;

Repeatedly permitted its belief of non-coverage under its policies to control its decision whether to settle on behalf of its insured;

“- Repeatedly offered unrealistically low figures to settle with Plaintiff; and

“- Repeatedly failed to explore options to settle the Plaintiff’s case and reserve coverage disputes between itself and its insured.”

Breihan was likewise found to have breached the covenant of good faith and fair dealing owed to Scottsdale in that it:

“- Repeatedly failed to explore options to settle the plaintiff’s case and reserve coverage disputes between itself and Scottsdale.

“- Failed to even discuss or attempt to negotiate a settlement with Scottsdale regarding coverage issues.

“The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest. [Citation.] When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured’s interest requires the insurer to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing.” (Comunale, supra, 50 Cal.2d at p. 659, italics added.)

The Supreme Court further explained the rationale for an insurer’s liability for an excess judgment: “An insurer who denies coverage does so at its own risk, and ... if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer’s breach of the express and implied obligations of the contract.” (Comunale, supra, 50 Cal.2d at p. 660, italics added.) An insurer may thus be liable in damages to its insured for amounts in excess of the policy limits. However, the policy limits remain as a restriction of the amount the insurer may have to pay to a third party claimant in connection with a claim on the policy. (Id. at p. 659.)

Similarly, in Crisci v. Security Ins. Co.(1967) 66 Cal.2d 425 , 432 [ 58 Cal.Rptr. 13 , 426 P.2d 173 ], the Supreme Court upheld an award of damages to an insured to compensate for excess liability incurred after the insurer refused to settle the claim, holding that it was enough to support the judgment that the insurer “ ‘knew that there was a considerable risk of substantial recovery beyond said policy limits' and that ‘the defendant did not give as much consideration to the financial interests of its said insured as it gave to its own interests.’ ” (Ibid., italics added.)

Some courts have assumed that an excess judgment must be in existence before a bad faith cause of action can be stated. In Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679 , 690 [ 319 P.2d 69 , 66 A.L.R.2d 1202 ] (cited in Comunale), the court stated that an insured’s cause of action for wrongful refusal to settle a claim arises when the insured incurs a binding judgment over the policy limits. Similarly, Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883 , 891-892 [ 162 Cal.Rptr. 115 ] and Finkelstein v. 20th Century Ins. Co. (1992) 11 Cal.App.4th 926 , 929 [ 14

To determine the reasonableness of a settlement offer for purposes of a later action against an insurer, the finder of fact must take into account that information available to the insurer at the time of the proposed settlement. (See Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775 , 793 [ 244 Cal.Rptr. 655 , 750 P.2d 297 ], citing Tech-Bilt, Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488 , 499 [ 213 Cal.Rptr. 256 , 698 P.2d 159 ].) A trier of fact on the issue of bad faith in a subsequent action must make a wide-ranging inquiry into such criteria as motive, knowledge, experience, and the ability to prophesy. (Walbrook Ins. Co. v. Liberty Mutual Ins. Co. (1992) 5 Cal.App.4th 1445 , 1456-1457 [ 7 Cal.Rptr.2d 513 ].) However, the main limiting factor in the calculus for the reasonableness analysis of an insurer’s decision on a settlement offer has always been whether there was great risk of a judgment against the insured in favor of a third party claimant, over policy limits. (Comunale, supra, 50 Cal.2d at p. 659.)

In summary, the Comunale line of cases emphasizes as requirements for insurer liability for breach of the covenant of good faith and fair dealing for failure to settle that (1) ultimately, coverage must be found to exist (Comunale, supra, 50 Cal.2d at p. 660); (2) The most reasonable method of resolving a claim is evaluated in light of the probability or risk at settlement time of an excess judgment against the insured (id. at p. 659); (3) an unavoidable additional factor in the insurer’s “reasonableness analysis” of the settlement decision is whether it may potentially be exposed to additional damages to its insured for any failure to settle (Johansen, supra, 15 Cal.3d at pp. 12, 16); and (4) when the settlement decision must be made, the insurer may not allow coverage beliefs or policy limits to control the settlement decision (id. at p. 16), but the insurer will not in any case be liable to the third party claimant for more than the policy limits; however, it may be liable to its insured for more than the policy limits in the event of a breach of the implied covenant (Comunale, supra, at p. 659). Finally, there is no explicit requirement for bad faith liability that an excess judgment is actually suffered by the insured, since the reasonableness analysis of settlement decisions is performed in terms of the probability or risk that such a judgment may be forthcoming in the future (but see Doser v. Middlesex

Contentions on Appeal

In an effort to show it did not breach any duty to settle, Scottsdale first argues that the Comunale line of cases should not apply because the $300,000 settlement demand by Camelot was not a policy limits demand (since the policy limit was $1 million) and that because of this gap between the demand and the policy coverage limits, it cannot be said that there was a considerable risk of an excess judgment if the settlement demand were refused. (Crisci v. Security Ins. Co., supra, 66 Cal.2d at pp. 431-432.) Camelot responds to that argument as follows: “By [Scottsdale]’s logic, liability insurers are free to act as unreasonably as they like so long as it ultimately turns out that excess judgments are not recovered against their insureds. This is obviously not the law. If it were the law, plaintiffs would have to create claims which exceeded policy limits simply to persuade the carrier to act reasonably.”

Scottsdale goes on to claim that the Comunale line of cases finding breaches of the duty to settle in the excess judgment context should not apply to these facts, where Camelot was apparently claiming both covered and uncovered property damage and the trial court found in the statement of decision that under the facts of this case, some unspecified number of the defects at the plaintiff’s project were covered, and some were not. The trial court had concluded that Scottsdale’s failure to settle the case and thereby “cap” the loss exposed Breihan to greater financial risk for those defects which would ultimately be determined to be not covered by the insurance policy, and stated, “This risk could have been avoided had a settlement been reached between [Breihan] and the plaintiff and the coverage disputes litigated later.”

Attacking this conclusion, Scottsdale draws a distinction between an insured’s potential personal liability for covered damages in an amount in excess of the monetary policy limits, and the insured’s potential personal liability for defects which fall outside the scope of the policy coverage at all. Scottsdale thus argues that “[e]xposing an insured to uncovered losses which are under the monetary limits of an insurance policy is not a breach of the implied covenant of good faith and fair dealing” and “[e]xposing the insured

In this case, the trial court faulted Scottsdale for failing to settle the claim, both as to noncovered and covered damages, and suggested that it should have done so and then litigated the coverage disputes later. This ruling was apparently based upon the Supreme Court’s statement in Johansen that an insurer should not make its determination on a settlement offer based on coverage considerations, but instead may accept a settlement offer while reserving its right with its insured to assert a defense of noncoverage. (Johansen, supra, 15 Cal.3d at p. 19.) If the insurer has reserved such rights but accepted a reasonable offer, it may seek to establish the noncoverage of the policy and seek reimbursement of the settlement payment from the insured. (Ibid.; see Maryland Casualty Co. v. Imperial Contracting Co. (1989) 212 Cal.App.3d 712 , 720-722 [ 260 Cal.Rptr. 797 ].)

The trial court’s conclusions in this respect return us to the Supreme Court’s statement in Comunale, supra, 50 Cal.2d at page 660, explaining the rationale for an insurer’s liability for an excess judgment: “An insurer who denies coverage does so at its own risk, and . . . if the denial is found to be wrongful it is liable for the full amount which will compensate the insured . . . .” (Italics added.) We believe the trial court’s interpretation of the Comunale line of cases to reach its conclusions runs counter to an accepted tenet of insurance law: “The rights of the parties are measured by the contract, and liability of the insurer ordinarily can be imposed only in this manner.” (12 Appleman, Insurance Law and Practice, § 7004, pp. 43, 47, fins, omitted.) Thus, the terms and conditions of the insurance policy must dictate the scope of the duties and performance to which the insured is entitled. Ordinarily, the policy limits restrict the amount the insurer may have to pay a third party claimant, but those limits do not restrict an insured’s potential damages for the insurer’s breach of contract. (Comunale, supra, 50 Cal.2d at p. 659.) An insurer clearly takes on the duty of protecting, defending, and indemnifying its insured with respect to the scope of coverage that was purchased and attendant duties (defense and settlement). The insurer does not, however, insure the entire range of an insured’s well-being, outside the scope of and unrelated to the insurance policy, with respect to paying third party claims. It is an insurer, not a guardian angel. Even if the insurer may not consider its coverage beliefs in deciding whether to accept a settlement offer, it may still bear in mind the distinctions between its potential monetary obligations to the third party claimant and to its insured.

We find support for our conclusions in this respect in a related doctrine, that there is no claim for “a malicious defense” when a defendant chooses to go to trial rather than settling a claim. In Triplett v. Farmers Ins. Exchange (1994) 24 Cal.App.4th 1415 [ 29 Cal.Rptr.2d 741 ], this court reviewed the authority which holds that a party cannot be held liable for merely standing on its right to a trial, as opposed to being required to settle a case. (Eastin v. Bank of Stockton (1884) 66 Cal. 123 , 127 [ 4 P. 1106 ]; Bertero v. National General Corp. (1974) 13 Cal.3d 43 , 52 [ 118 Cal.Rptr. 184 , 529 P.2d 608 , 65 A.L.R.3d 878 ].) Here, in the underlying action, Scottsdale was essentially standing on its right to go to trial rather than settling the case for the amount demanded, which it felt was unsupported by its investigation and its cost estimates. As outlined above, the external limit of a probable excess judgment was not present to require Scottsdale, as a prudent or reasonable insurer, to settle the claim within policy limits rather than go to trial. Moreover, there was no potential of coverage as to some of the claimed damages. (See Dykstra v. Foremost Ins. Co. (1993) 14 Cal.App.4th 361 , 368 [ 17 Cal.Rptr.2d 543 ].)

In conclusion, we do not mean to imply unqualified approval of Scottsdale’s conduct in the underlying litigation. Certainly, the implied covenant of good faith and fair dealing is a strong incentive to an insurer to act in a reasonable manner in settling claims within policy limits in appropriate situations. The peculiar circumstances of this case, however, persuade us that Scottsdale did not breach the implied covenant of good faith and fair

Our resolution of this issue makes it unnecessary for us to address the complex issue of whether a stipulated judgment of this nature may support the assignment of a bad faith case. (See Smith v. State Farm Mut. Auto Ins. Co., supra, 5 Cal.App.4th at p. 1114; Doser v. Middlesex Mutual Ins. Co., supra, 101 Cal.App.3d at p. 892; Wright v. Fireman’s Fund Ins. Companies (1992) 11 Cal.App.4th 998 , 1016-1017 [ 14 Cal.Rptr.2d 588 ].) Nor need we address the comparative bad faith issues raised in Camelot’s cross-appeal, nor Scottsdale’s arguments concerning attorney fees and prejudgment interest. Since we find the judgment must be reversed on the bad faith issues because, as a matter of law, there was no bad faith breach of the implied covenant shown here, we reverse the judgment and direct the trial court to enter judgment in accordance with the principles of this opinion. (See Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423 , 440 [ 296 P.2d 801 , 57 A.L.R.2d 914 ].)

Disposition

The judgment is reversed with directions to enter judgment in favor of appellant Scottsdale in accordance with the principles expressed in this opinion. Costs on appeal awarded to appellant Scottsdale.

This disposition renders it unnecessary for this court to address the issues raised by appellant Camelot.

Froehlich, J., and Nares, J., concurred.

A petition for a rehearing was denied August 23, 1994.