Lead Opinion
Opinion
In response to the request of the Ninth Circuit Court of Appeals, we answer the following certified question: “Whether an insurer defending a personal injury suit under a reservation of rights may recover settlement payments made over the objection of the insured when it is later determined that the underlying claims are not covered under the policy.” (Blue Ridge Ins. Co. v. Jacobsen (9th Cir. 1999)
I. Factual and Procedural Background
The following statement of undisputed facts is derived in part from the Ninth Circuit’s opinion. (Blue Ridge, supra, 197 F.3d at pp. 1009-1011.) During the 1970’s until late 1989, defendants and insureds Brigitte and John Jacobsen operated a dog kennel business in Sun Valley, California. They specialized in importing champion German shepherd and Rottweiler dogs from Germany and reselling them in the United States. Robert and E’dee Bolognesi, plaintiffs in the underlying action, also operated a dog kennel business. The Bolognesis had purchased several dogs from Brigitte Jacob-sen, some directly from her kennel, and some specifically imported from Germany by her at their request.
Although Brigitte Jacobsen closed her kennel business in 1989, in 1991 she assisted the Bolognesis in purchasing a German Schutzhund III male Rottweiler dog—Benno Vom Gelderland. Approximately five months later, Benno severely mauled E’dee Bolognesi. E’dee was 29, and the mother of a young child. The Bolognesis sued the Jacobsens, alleging theories of product liability, negligence, and fraud. The Jacobsens tendered the defense to their homeowner’s insurer, Blue Ridge Insurance Company (Blue Ridge).
Blue Ridge disputed coverage on the grounds that the Bolognesis’ claims fell within either the “business pursuits” or the “professional services” exclusion to the homeowner’s policy. Blue Ridge agreed to defend the Jacobsens subject to a reservation of rights which provided: “[Bjecause it appears likely that your liability in this action, if any, will not be covered under the policy, Blue Ridge Insurance Company hereby reserves its rights to . . . (b) Refuse to indemnify you with respect to any judgment or settlement; (c) Initiate a separate action to determine our duty to defend or indemni[f]y you; (d) Obtain recovery from you of any costs or expenses, including fees for legal services . . . ; (e) Request your participation in any settlement of the above-titled action with the understanding that any contribution made by us is subject to the reservation of our right to dispute coverage, unless we expressly waive in writing all such reservations.” Blue Ridge provided the Jacobsens with independent counsel for defense in the underlying action. (See Civ. Code, § 2860, subd. (a).)
Shortly thereafter, Blue Ridge brought a declaratory judgment action seeking adjudication of the coverage issue. In response to the Jacobsens’
On May 23, 1996, the Bolognesis made a policy limits settlement demand of $300,000 to the Jacobsens. The “[p]laintiff makes no secret of the purpose of this policy limits demand: it is to ‘open up’ or ‘delimit’ the policy should Blue Ridge Insurance fail to accept this offer and plaintiff later obtain an eight figure judgment. Although plaintiffs would actively pursue the assets of the Jacobsens after obtaining such a judgment, if . . . the judgment was not satisfied, plaintiffs would also consider accepting from the Jacobsens an assignment of rights against their insurance carriers for any possible bad faith and extracontractual liability which might have arisen as a result of Blue Ridge Insurance Company’s failure to settle this case within policy limits when presented with the opportunity.” The letter further stated E’dee Bolognesi’s medical bills to date totaled more than $200,000. She suffered 17 fractures to her left arm, and both arms were torn apart with severe tissue loss. She required a venous transplantation from her leg to her arm, together with muscle and skin grafting, leaving her with terrible scarring. She had undergone 17 separate surgeries. The attack “was all the more devastating because it struck E’dee Bolognesi—a beautiful young woman of 29—just as she was about to enter the prime of life.” The offer was to expire on June 7, 1996. This date was subsequently extended to June 12, 1996.
A series of letters between Blue Ridge and counsel for the Jacobsens ensued. On June 4, 1996, Blue Ridge informed the Jacobsens that it had determined the settlement offer was reasonable. It proposed to accept the demand under a reservation of its right to seek recovery of the settlement amount from the Jacobsens. It also gave the Jacobsens the option to assume their own defense if they found the settlement offer unreasonable. If Blue Ridge did not hear from the Jacobsens by June 10, 1996, it would assume they had no objection and would “proceed to accept the settlement demand under a full and complete reservation of rights including the right to seek reimbursement from [the Jacobsens] for the amounts so paid.”
On June 10, 1996, the Jacobsens responded. “The simple answer to your letter is no.” The Jacobsens stated they contested liability and that there was substantial evidence E’dee Bolognesi had voluntarily assumed the risk of her injury. “Under the terms of your client’s policy, it has the ability to settle claims without the consent of the Jacobsens. Should your client care to exercise its rights under the policy to settle the claim, then it may do so, pay the settlement and close its books on this matter. However, the Jacobsens
On June 14, 1996, Blue Ridge responded, reiterating its proposal to accept the settlement under a reservation of rights, but first offering the Jacobsens the opportunity to assume their own defense. In response to the Jacobsens’ “ ‘blown’ ” policy limits comment, Blue Ridge said the comment “appears to constitute a statement of your clients’ position to the effect that since Blue Ridge has determined that the settlement demand is reasonable, your clients believe that it is Blue Ridge’s obligation to accept that settlement proposal. While Blue Ridge does not necessarily share your view of the law in this regard, Blue Ridge does propose to do exactly what you contend Blue Ridge is obligated to do: namely, accept the settlement proposal; but before doing so, . . . it is offering your clients an opportunity to reassume their own defense. If we are incorrect in our interpretation of your June 10, 1996 letter in this regard, please advise.” As to the question of liability, Blue Ridge stated: “While [you] assert[ ] that your clients ‘contest liability’ and note[ ] the existence of evidence to support a claim that Mrs. Bolognesi voluntarily assumed the risk of her injury, you must candidly concede that there is likewise evidence to support a finding of liability on the part of the Jacobsens as well as evidence negating the defense of assumption of risk.”
The Jacobsens responded later the same day. “[Y]our client [Blue Ridge] has no right to settle a claim, absent an agreement with its insured, and seek reimbursement from its insured for the amount of the settlement. The Jacobsens are unwilling to give Blue Ridge that agreement. The Jacobsens have advised you of the reasons why they believe that the defense of the claim is necessary and justified. HQ ... HQ If Blue Ridge desires to settle the underlying lawsuit, it may do so subject to the terms and conditions of the policy. But in pursuing such a course of conduct, it is protecting its own interests. As such, it is not entitled to reimbursement for payments made in settlement.”
On June 18, 1996, Blue Ridge responded, stating, “If . . . your position, on behalf of the Jacobsens, is that the case is one of no liability and that you
On June 19, 1996, the Jacobsens responded, essentially asserting that Blue Ridge was depriving its insureds of the opportunity to contest the personal injury action and driving them into bankruptcy.
On June 24, 1996, Blue Ridge responded, disputing these allegations, and reiterating comments made in earlier correspondence. On June 27, 1996, the Jacobsens sent another letter, noting that the plaintiffs had agreed to extend the time to respond to the settlement offer to July 1, 1996. “Your client has the ability to accept this settlement offer. Indeed, it has admitted that the settlement offer is reasonable. The Jacobsens, on the other hand, do not have $300,000.” “[T]he Jacobsens will never be in a position to meaningfully respond to any judgment that Blue Ridge might get.” “The Jacobsens simply cannot agree to any settlement outside the terms of the policy-—they cannot afford it. If Blue Ridge does not accept this settlement offer, it does so at its own risk. If it does accept this settlement offer, it should be in a position to close its books and walk away from this matter.”
Having failed to secure the Jacobsens’ consent, Blue Ridge then sought to intervene in the underlying action for the purpose of obtaining the trial court’s permission to participate in the settlement under a reservation of rights. The motion to intervene was denied. Blue Ridge subsequently accepted the Bolognesis’ settlement demand on behalf of the Jacobsens, but over their objection. The trial court in the underlying action found the settlement to be in good faith.
After settlement of the state court action, the stay was lifted in the federal action, and Blue Ridge amended its complaint to assert a claim for reimbursement of the $300,000 settlement payment. Blue Ridge did not seek reimbursement of defense fees and costs.
II. Discussion
A. Background
An insurance policy is a contract in which the insurer agrees to pay up to a specified sum should certain losses occur. In exchange, the insured pays the insurer premiums for this coverage against risk of loss. (Buss v. Superior Court (1997)
An insurer has the right and broad duty to defend the insured against third party claims potentially within the policy’s coverage. (See, e.g., Montrose Chemical Corp. v. Admiral Ins. Co. (1995)
An insurer may agree to defend a suit subject to a reservation of rights. (Truck Ins. Exchange v. Superior Court (1996)
An insurer can reserve its right to assert noncoverage unilaterally merely by giving notice to the insured. (Cf. American Motorists Ins. Co. v. AlliedSysco Food Services, Inc. (1993)
The issue in this case concerns the insurer’s ability to seek reimbursement for settlement of what are later determined to be noncovered claims when the insureds withhold consent to the settlement. Two of our cases, Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975)
In Johansen, supra,
In so holding in Johansen, we rejected the insurer’s argument that it was required to settle all cases regardless of whether the policy provided coverage: “[A]n insurer in defendant’s position retains the ability to enter an
It is the single word “agreement” in this portion of Johansen that has given rise to the issue in this case. In Johansen, the insurer did not seek reimbursement of a settlement. Hence, we were not in that case directly addressing the steps an insurer must take in order to obtain reimbursement of a settlement for a noncovered claim. Nevertheless, as can be seen in Court of Appeal cases interpreting Johansen, our use of the term “agreement” has caused uncertainty as to the precise nature of the prerequisites for obtaining reimbursement of reasonable settlement payments.
For example, in Val’s Painting, supra,
The Court of Appeal held Maryland was entitled to seek reimbursement of the settlement from its insured. (Maryland, supra,
In Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993)
In Buss, supra,
In addition, we stated in Buss, “We note that the Court of Appeal assumed that, in order to obtain reimbursement for defense costs, the insurer must reserve its right thereto. To the extent that this right is implied in law as quasi-contractual, it must indeed be reserved. (Cf. 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 92, p. 123 [stating that, ‘[i]n an action in quasi-contract . . . , a demand is ordinarily a necessary prerequisite’ (original italics)].) Through reservation, the insurer gives the insured notice of how [the insurer] will, or at least may, proceed and thereby provides [the insured] an opportunity to take any steps that it may deem reasonable or necessary in response—including whether to accept defense at the insurer’s hands and under the insurer’s control [citation] or, instead, to defend itself as it chooses. To the extent that this right is implied in fact in the policy as contractual, it should be reserved. Through reservation, the insurer avoids waiver.” (Buss, supra,
B. Analysis
As noted, the issue here is whether Blue Ridge may seek reimbursement for the settlement paid on the Jacobsens’ behalf even in the absence of the Jacobsens’ express agreement. We conclude it may. Here, the Jacobsens were on notice both by the policy language and by Blue Ridge’s express reservation of rights when it assumed the defense that Blue Ridge might seek reimbursement from them for what were ultimately determined to be non-covered claims. Moreover, Blue Ridge notified the Jacobsens of its intention to accept what was ultimately determined to be a reasonable settlement offer, and offered the Jacobsens the opportunity to assume their own defense. Under such circumstances, Blue Ridge satisfied the prerequisites for seeking reimbursement for noncovered claims included in a reasonable settlement payment: (1) a timely and express reservation of rights; (2) an express notification to the insureds of the insurer’s intent to accept a proposed settlement offer; and (3) an express offer to the insureds that they may assume their own defense when the insurer and insureds disagree whether to accept the proposed settlement.
Under Johansen, if an insurer fails to accept a reasonable settlement offer within the policy limits, and the judgment exceeds the policy limits, the insurer risks liability for the entire judgment and any other damages incurred by the insured. Moreover, the insurer may not consider the issue of coverage in determining whether the settlement is reasonable. (Johansen, supra, 15 Cal.3d at pp. 12, 15, 16.)
In light of Johansen, were we to conclude insureds could, as in this case, refuse to assume their own defense, insisting an insurer settle a lawsuit or risk a bad faith action, but at the same time refuse to agree the insurer could seek reimbursement should the claim not be covered, the resulting Catch-22 would force insurers to indemnify noncovered claims. If an insurer could not unilaterally reserve its right to later assert noncoverage of any settled claim, it would have no practical avenue of recourse other than to settle and forgo reimbursement. An insured’s mere objection to a reservation of right would create coverage contrary to the parties’ agreement in the insurance policy and violate basic notions of fairness.
Moreover, applying Buss’s reasoning regarding reimbursement of defense costs to reimbursement of reasonable settlement costs, the insurer only has a
Indeed, the right to reimbursement is implied by the terms of the insurance policy. Here, Blue Ridge agreed that as to “bodily injury or property damage caused by an occurrence to which this coverage applies,” the insurer would indemnify the insured. By implication, Blue Ridge had no obligation to pay for noncovered claims. Because notice was given at the outset both by the reservation of rights and policy language that Blue Ridge might seek reimbursement if there were no coverage, the Jacobsens had full knowledge of the possible consequences of accepting the defense by the insurer. They could not later object on the ground Blue Ridge was not entitled to condition payment of the settlement on reservation of its right to seek reimbursement for any noncovered claim.
In addition, the Jacobsens conceded in their correspondence with Blue Ridge that Blue Ridge had the right under the policy to settle third party claims against the Jacobsens.
Finally, as the amici curiae
The Jacobsens assert that an insurer should not be permitted to terminate its defense obligation by settling the claim under a unilateral reservation of
Here, however, Blue Ridge was obligated to accept a reasonable settlement offer as part of its duty of good faith and fair dealing or risk excess exposure. (Johansen, supra, 15 Cal.3d at pp. 12, 16, fn. 5; Crisci v. Security Ins. Co. (1967)
The Jacobsens note that Blue Ridge could add a reimbursement provision to its insurance policy or include a deductible. However, as we stated in Buss the right to reimbursement is implied in law and need not be expressly stated in the policy. (Buss, supra,
The Jacobsens also summarily argue that Blue Ridge is a volunteer, and hence not entitled to reimbursement. It is not apparent how an insurer that has been precluded from earlier resolving the question of coverage, and that is obligated to accept a reasonable settlement or risk excess exposure, acts as a volunteer in accepting that settlement merely because its insured objects to its reservation of the right to seek reimbursement. As the court stated in State Farm & Casualty Co. v. Cooperative of American Physicians, Inc. (1984)
Finally, the Jacobsens rely on certain out-of-state cases, none of which persuade us to reach a different result. In Texas Assn. of Counties County Gov. Risk Management Pool v. Matagorda County (Tex., Dec. 21, 2000, No. 98-0968)
We answer the question certified by the Ninth Circuit Court of Appeals in the affirmative.
Kennard, J., Baxter, J., and Chin, J., concurred.
Notes
In Buss, “[n]ot only did [the insurer] reserve all its rights, contractual and otherwise,” but, “receiving consideration, Buss agreed thereto.” (Buss, supra,
The policy provided: “We may investigate and settle any claim or suit that we decide is appropriate.”
Amici curiae are American Insurance Association, American International Group, Inc., National Association of Independent Insurers, and Truck Insurance Exchange.
Concurrence Opinion
I concur with the result and much of the reasoning of the majority opinion and in the Chief Justice’s concurring opinion. I write separately to address an issue raised only implicitly by this case. As the majority state: “[T]he Jacobsens took the position that since Blue Ridge had determined the settlement was reasonable, it had an obligation to accept the settlement or ‘ “blow[]” ’ its policy limits. Hence, they sought to receive either the benefit of an unconditional settlement of an uncovered claim, or, in the alternative, should Blue Ridge fail to settle, the opportunity to make a bad faith claim.” (Maj. opn., ante, at p. 504.) In rejecting this position as fundamentally unfair, the majority suggest that the insured has basically two options when it disagrees with an insurer about whether to settle a case for which the insurer claims noncoverage: (1) to accept the settlement anyway, including the insurer’s reservation of rights that may make the insured liable; or (2) to assume its own defense, however financially burdensome that may be.
A third option, that would neither place the insurer in a “Catch-22” position (maj. opn., ante, at p. 502) nor place an undue burden on the insured
Werdegar, J., concurred.
Concurrence Opinion
I concur in the result reached by the majority opinion and in much of its analysis, with the understanding that nothing contained therein alters the established standard—not mentioned by the majority—governing an insurer’s evaluation of the reasonableness of a settlement offer in this context. “[I]n determining whether to settle[,] the insurer must give the interests of the insured at least as much consideration as it gives to its own interests . . . .” (Crisci v. Security Ins. Co. (1967)
Mosk, J., and Werdegar, J., concurred.