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), thе 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)
Moreover, we conclude the trial court erred in equating the noncovered defects at the construction project with the defects which were clearly
Factual and Procedural Background
The underlying action was a construction defect lawsuit filed by Camelot against Breihan for alleged construction deficiencies at a 23-unit residential condominium complex developed and built by Breihan, primarily through services provided by subcontractors. Sales of the Camelot condominiums occurred in 1985 and 1986. Scottsdale provided liability coverage to Breihan for the period between April 1985 and April 1987. The insurance policies were comprehensive general liability policies with broad form endorsement, with $1 million limits of liability. 1 After suit was filed, Scottsdale initially refused to provide a dеfense to Breihan, based upon erroneous allegations in the complaint, which were immediately corrected by Camelot’s counsel to allege that the deficiencies alleged occurred in late 1986 or 1987, within Scottsdale’s policy period. Scottsdale then hired counsel, Attorney Douglas McCorquodale and his associate, Rebecca Ryan, to defend Breihan’s interest under a reservation of rights letter dated July 11, 1989. An answer was filed in July 1989, along with a cross-complaint against several subcontractors engaged in the construction of the project.
Camelot offered to compromise its claims against Breihan in July 1989 in the amount of $280,000 (Code Civ. Proc., § 998), but Breihan’s retained counsel did not recommend acceptance of that offer based on the insufficient information he had at the time and because he did not believe the offer was made in good faith. Sсottsdale then sent a letter dated August 14, 1989, to Breihan, stating that it would not accept the offer based on insufficient information to evaluate the nature and extent of Camelot’s claims, and because it was unclear what portion of the claims were covered or not covered by the insurance policy. Scottsdale informed Breihan that it might wish to consider settling with Camelot or responding to the offer in some other fashion.
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 informаtion 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 аssign 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
Three days after the September 24, 1990, settlement conference, which had been unsuccessful, Camelot and Breihan’s personal counsel, Eugene Yale, negotiated an agreement calling for a stipulated judgment to be entered in the amount of $675,000 against Breihan in return for a release from the obligation to pay and a promise not to execute judgment. Camelot was also assigned any rights Breihan may have had under its insurance contract. Scottsdale’s witness, claims adjuster Phil Metzger, testified at the bad faith trial that he was not aware of this transaction and was shocked that the stipulated judgment had been entered, as he believed settlement negotiations were still ongoing. Retained defense counsel signed the stipulation and the judgment, although Attorney Ryan later testified that she felt the amount of the stipulated judgment was еxcessive.
On October 1,1990, the stipulated judgment was put on the record in front of the Honorable Thomas O. LaVoy. The court heard no witnesses and made no factual findings. Scottsdale was not a party to the hearing or the judgment. Breihan’s retained counsel McCorquodale stated that he felt the stipulated amount was unreasonable.
The action before us, a bad faith insurance action for damages, prejudgment interest, and attorney fees, based on alleged breach of the covenant of good faith and fair dealing, was filed by Camelot as Breihan’s assignee on October 31, 1990.
2
Scottsdale’s answer alleged a number of affirmative defenses, including comparative bad faith. Camelot brought a motion for summary judgment, which was taken off calendar as defective and on renewal was denied for failure to negate any of Scottsdale’s affirmative defenses. Court trial commenced January 29, 1992, and was completed February 4, 1992. The trial court issued a decision after trial and notice to prepare a statement of decision and judgment, including an award of attorney fees and prejudgment interest. Before the statement of decision was filed, Scottsdale sought reconsideration based on recent case authority,
Smith
v.
State Farm Mut. Auto Ins. Co.
(1992)
Thе 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 signеd 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
As conclusions of law, the trial court found that the “no action” clause in the insurance policies 3 did not preclude this bad faith action, which did not arise “on the policy” (Ins. Code, § 11580), but rather as a result of Scottsdale’s tortious conduct in refusing to settle and thereby exposing Breihan to personal liability. 4 The court then found that the reasoning of the Comunale line of cases, that an insurer should not permit coverage beliefs to interfere with and/or dominate its settlement consideration, was applicable in this factual context where some of the defects at the Camelot project were covered and some were not. The court disagreed with Scottsdale’s argument that the Comunale authority should be limited to cases in which the plaintiff asserted claims in excess of the monetary limits of the policy. In holding that Scottsdale’s conduct was actionable here, the trial court explained: “In this case, while it is true that there were substantial policy limits and it was highly unlikely that [Breihan] ever would have had a judgment entered against it in excess of these limits, [Scottsdale]’s failure to give at least equal consideration to the interests of its insured when it rejected the Plaintiff’s reasonable settlement of $300,000.00, placed [Breihan] in a position of unnecessary risk. Under the facts of this case, some of the defects at the Plaintiff’s project were covered, some were not. By failing to settle the case and thereby ‘cap’ the loss, [Breihan] was exposed to greater financial risk for those defects which may ultimately have been determined to be non-covered items. This risk could have been avoided had a settlement been reached between [Breihan] and the Plaintiff and the coverage disputes litigated later.”
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 Scоttsdale 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.
Failed to acknowledge any responsibility for non-covered items of defect.
Failed to give sufficient notice to Scottsdale of it[s] intent to enter a stipulated judgment.” Judgment for Camelot was accordingly reduced by 30 percent because of its assignor’s comparative bad faith.
Finally, the court found that Breihan had suffered a $675,000 judgment against it, legally caused by Scottsdale’s unreasonable rejection of the reasonable $300,000 settlement offer. The court noted that Camelot’s covenant not to execute on the judgment did not relieve Breihan of the judgment. It was accordingly ordered that once the setoff for Breihan’s comparative bad faith was made, Camelot would be entitled to $472,500 plus 10 percent prejudgment interest since the date of the stipulated judgment, October 23, 1990. Camelot was awarded attorney fees as the prevailing party. 5 Scottsdale appealed and Camelot cross-appealed the judgment.
Discussion
We shall first outline the circumstances under which an insurer’s implied obligation of good faith and fair dealing requires it to settle a claim on the policy for a monetary amount within the policy limits.
(Comunale, supra,
I
Duty to Settle
An insurance policy, like other contracts, contains an implied covenant of good faith and fair dealing that neither рarty will do anything to injure the right of the other to receive the benefits of the agreement. Such covenant of good faith and fair dealing gives rise to an insurer’s obligation, sounding in both contract and tort, to accept a reasonable settlement offer on behalf of its insured.
(Johansen
v.
California State Auto. Assn. Inter-Ins. Bureau
(1975)
“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 thе 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,
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,
Similarly, in
Crisci
v.
Security Ins.
Co.(1967)
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)
Moreover, in deciding whether to settle the claim, “[T]he insurer must conduct itself as though it alone were liable for the entire amount of the judgment. [Citation.] Thus, the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured,
the ultimate judgment is likely to exceed the amount of the settlement offer.
Such factors as the limits imposed by the policy, a desire to reduce the amount of future settlements, or a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one.”
{Johansen, supra,
Samson
v.
Transamerica Ins. Co.
(1981)
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)
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,
II
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 dеcision 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
Ill
Analysis
In discussing Scottsdale’s contentions, we note at the outset that an insurer’s liability for an excess judgment amount suffered by its insured turns not upon its refusal to defend, but upon its refusal to accept an offer of settlement within policy limits.
(Johansen, supra,
Despite the disagreements between Scottsdale and Breihan’s retained counsel, and between Scottsdale and its insured, this is not a case in which the insurer abandoned its insured and declined to defend at all. (See
Samson
v.
Transamerica Ins. Co., supra,
However, the above authority
(Travelers Ins. Co.
v.
Lesher, supra,
The problem with the trial court’s theory is that the reasonableness of a settlement offer cannot be evaluated in a vacuum or merely subjectively by a trial judge presented with a bad faith claim against the insurer, even taking into account the various circumstances of the case. Instead, the
Comunale
line of cases teaches that the most reasonable manner of disposing of a claim may be a settlement within policy limits “whenever it is likely that the judgment against the insured will exceed policy limits.”
(Johansen, supra,
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 cоverage considerations, but instead may accept a settlement offer while reserving its right with its insured to assert a defense of noncoverage.
(Johansen, supra,
The trial court’s conclusions in this respect return us to the Supreme Court’s statement in
Comunale, supra,
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)
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 сase, 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,
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.
Notes
The two. policies each had $1 million limits of liability; No. GLS 018645 ran from April 3, 1985, to April 3, 1986, and No. GLS 077087 ran from April 22, 1986, through April 22, 1987.
The original complaint also alleged breach of insurance contract, but that cause of action was dismissed at the outset of trial.
The language contained in the insurance policy concerning the “no action” clause is one of the conditions which must be met by the insured in order to bring an action upon the policy. The language is as follows: “No action shall lie against the company unless, as a condition precedent thereto, there shall have been full compliance with all of the terms of this policy, nor until the amount of the insured’s obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company.” (Italics added.)
We agree with the trial court that Scottsdale was not justified in relying on the insurance policies’ “no action” clauses to defeat Camelot’s action. This was an assigned bad faith action for breach of the implied covenant of good faith and fair dealing, rather than an action on the policy, such as might have been brought under Insurance Code section 11580, subdivision (b)(2). Similarly, the policy’s provisions requiring insured’s cooperation and insurer’s permission to assign any claims are not applicable in this bad faith context.
After judgment was issued and a memоrandum of costs filed by Camelot, Scottsdale moved to tax costs on the grounds that some of the claimed attorney fees were excessive. The motion was granted in part and the award of attorney fees reduced.
When does such a breach occur? “Assuming bad faith, the breach of the insurer’s obligation occurs at the time when it indulges in the unwarranted rejection of a reasonable compromise offer within the policy limits. [Citations.]”
(Critz
v.
Farmers Ins. Group
(1964)
Insurer’s continued reliance on the alienated premises exclusion was highly questionable at that time in light of recent case authority,
Maryland Casualty Co.
v.
Reeder, supra,
In
Comunale, Johansen,
and
Samson,
the basic coverage dispute was whether the particular vehicle involved in the accident was covered at all by the policy; that is a very similar basic coverage problem to that involved here, whether particular property damage fell at all within the scope of the policy provisions. However, in those cases, coverage was found; in this case, only partial coverage existed.
(Comunale, supra,