Merritt v. Reserve InsuranceMerritt v. Reserve Insurance
Opinion
In 1961 a truck driven by Merritt and owned by Sterling Transit collided with a truck driven by Bernal and owned by J. A. Stafford Co., a California corporation. Merritt sued Bernal and Stafford Co. for personal injuries, and Sterling Transit sued them for property damages. In 1964 judgment was obtained by Merritt for $434,000 and by Sterling Transit for $21,000, and this judgment was affirmed on appeal in 1965.
Reserve Insurance Company, the liability insurance carrier for Stafford Co., paid $100,000 to Merritt, the full amount of its personal injury coverage, and paid $21,000 to Sterling Transit. There remained unsatisfied
The Pleading of Bad Faith.
The pertinent allegations of the count charging Reserve with bad faith defense of the case of Merritt v. Stafford Co. are:
“XIH
“In connection with the case of Merritt vs. Stafford . . . defendants [Reserve] . . . undertook the defense of said action on behalf of J. A. Stafford Trucking Co. and Salvador Bernal and took complete charge and control of the litigation in said action. Said defendants employed counsel to defend said action . . . and the counsel thus selected and appointed . . . acted for and on behalf of and as the agent and representative for defendants and each of them.
“XIV
“Defendants, and each of them, did not act in the best interests of J. A. Stafford Co. and Salvador Bernal and did not exercise the good faith required of them by the law in handling of the defense оf J. A. Stafford Co. and Salvador Bernal in the case of Merritt vs. Stafford ... in that said defendants failed to properly investigate and prepare for said litigation;
History of First Suit.
On 3 August 1960 Reserve Insurance issued an automobile liability insurance policy to Stafford Co., which provided personal injury coverage of $100,000 for each person and $300,000 for each accident, and property damage coverage of $25,000. The policy bound Reserve to pay to the limits of its coverage any sums the insured should become legally obligated to pay as damages and tо defend any suit seeking damages against the insured. The policy authorized Reserve to investigate, negotiate, and settle any claim or suit against the insured as it deemed expedient.
On the evening of 20 February 1961 a southbound truck owned by Sterling Transit and driven, by Merritt collided on Highway 99 near Merced with the rear of Stafford Co.’s southbound truck driven by Bernal, and as a result of the collision Merritt suffered severe and permanent personal injuries. Shortly after the accident, both Reserve, the insurance carrier for Stafford Co., and Transport Indemnity, the insurance carrier for Sterling Transit, undertook separate investigations of the accident.
Reserve obtained a statement from Robert Cox, who said he was driving southbound on Highway 99 in the slow lane about 125 feet behind Stafford Co.’s truck; that Merritt’s truck had been following him at 60 miles per hour, had passed him on the left, had then “whipped” back into the slow lane and collided with the rear of Stafford Co.’s truck; that Merritt’s truck had flipped over, and Cox had pulled the injured Merritt from the cab of his truck. Reserve also secured a statement from Stafford Co.’s driver, Bernal, who said he was traveling at 45 miles an hour when he was struck in the rear by Merritt’s truck; that he had recently checked his tail lights, and they were functioning at the time of the accident. Reserve’s investigators examined Stafford Co.’s vehicle, checked with the highway patrol officer who handled the accident, obtained a copy of the California Highway Patrol accident report, and attempted without success to talk to the injured Merritt. Reserve’s Fresno adjuster reported: “It is obvious,
Transport Indemnity’s investigation on behalf of Sterling Transit, the owner of Merritt’s truck, covered much the same ground. But its investigation also included a number of photographs of the Stafford Co. vehicle as well as an inspection by an electrical engineer of the condition of the lights on the Stafford Co. vehicle.
In June 1961, four months after the accident, Merritt filed suit against Stafford Co. and Bernal for $400,000 damages for personal injuries, and Sterling Transit sued for $24,000 property damages to its vehicle. Stafford Co. forwarded the complaint to Reserve, and the latter then advised Stafford Co. by registered mail that “[t]he amount of damages requested in this suit is $400,000 which is in excess of the limits of coverage provided under your policy with Reserve Insurance Company. This is to advise you, therefore, that you may at your option retain legal counsel to represent your interests in the excess amount.” The letter also informed Stafford Co. that Reserve had employed the law firm of Hecker, Dunford & Kenealy to represent Stafford Co. in the defense of the suit. Reserve forwarded its file on the accident to the defending law firm, and that firm concluded from its study of the file that although serious personal injuries were involved, the case was one of non-liability. Thereafter, throughout the course of its employment the firm of Hecker, Dunford & Kenealy consistently and repeatedly advised the carrier that the case was one of non-liability. A chronological representation of this advice follows:
14 July 1961 Letter, Hecker, Dunford & Kenealy to Reserve: The case is “an absolute case of nonliability.” This advice was consistent with that previously given Reserve by'its Fresno adjuster and with information contained in the California Highway Patrol accident report, which attributed responsibility for the accident to an improper lane change by Merritt.
19 November 1962 Letter, Hecker, Dunford & Kenealy to Reserve: This is “a case of virtually no liability, and one that certainly should be successfully defended.”
28 January 1963 Letter, Hecker, Dunford & Kenealy to Reserve: “[T]his [is] a case of nonliability.”
1 April 1963 Letter, Hecker, Dunford & Kenealy to Reserve: “This is a nonliability case in which the plaintiff collided with the rear of our truck. . . . We continue to believe that this is a case of absolute non-liability.”
27 May 1963 Letter, Hecker, Dunford & Kenealy to Reserve: This is “a case of absolutely no liability.”
5 June 1963 Letter, Hecker, Dunford & Kenealy to Reserve: “We know of nothing on which he [plaintiff] can base a case.”
23 October 1963 Letter, Hecker, Dunford & Kenealy to Reserve: “This is a case of questionable liability.” Plaintiff’s chance of winning “is too remote to even place a settlement evaluation.”
30 January 1964 Letter, Hecker, Dunford & Kenealy to Reserve: “[T]his case will be successfully defended.”
Dunford, the firm’s attorney who ultimately tried the case, knew that Reserve’s personal injury liability under its policy was limited to $100,000 for each person and $300,000 for each accident. However, from time to time, Dunford was assured by J. A. Stafford, the president of Stafford Co., that the latter had taken out an excess policy of liability insurance in an unknown amount. Dunford at various times describеd the limit of Stafford Co.’s personal injury liability insurance as $100,000, $300,000, $500,000, or unknown. Up to the time of the second trial in 1971 J. A. Stafford continued to insist in the existence of an excess policy, but he never identified or produced such a policy for Reserve.
Prior to the trial Dunford told Stafford there was nothing to worry about; there was no need to settle; it was not necessary for Stafford to be personally present at the trial. The firm of Hecker, Dunford & Kenealy also consistently advised Reserve and its agents that no possibility for settlement existed:
28 January 1963 Letter to Reserve: “We do not see any possibility of even considering or discussing settlement.”
27 May 1963 Letter to Reserve: The compensation carrier reasonably expects to expend approximately $300,000 in care. “Obviously settlement is completely out of question in this case.”
23 October 1963 Letter to Reserve: Plaintiff’s chance “of winning is too remote to even place a settlement evaluation. It is obvious that they will not accept a token settlement.”
No settlement offer was ever made by Merritt, or Sterling Transit, or Transport Indemnity, Sterling Transit’s workmen’s compensatiоn insurance carrier, and the sole demand on behalf of Merritt up to the time of trial was the $400,000 set out in the complaint. On the day the trial started, Merritt sought and received permission to increase his prayer for damages from $400,000 to $650,000. Dunford did not inform Stafford Co. of the increase.
The result of the trial turned out quite differently from what had been anticipated by defense counsel. Merritt testified he was going 45 to 50 miles an hour when he saw a sudden flash of lights in front of him and crashed into Stafford Co.js slowly moving vehicle before, he could stop. The electrical engineer who had inspected Stafford Co.’s vehicle two days after the accident on behalf of Transport Indemnity, the insurance carrier for Sterling Transit, testified that the lighting system on Stafford Co.’s vehicle contained defects that could have caused its rear lights to fail. Plaintiffs discredited the testimony of Bernal, Stafford Co.’s driver, by pointing out improbabilities in his estimate of travel times and by bringing out the fact that Bernal had two felony convictions for smuggling. Plaintiffs discredited Cox’s testimony through the use of traffic-accident experts, who concluded that Cox’s version of the times and distances involved in the аccident was physically impossible. Plaintiffs also pointed out that despite Cox’s claim to close involvement in the accident, the California Highway Patrol accident report did not list his name as a witness.
The jury returned a verdict of $434,000 for Merritt and $21,000 for Sterling Transit against Stafford Co. and Bernal. The court denied defense motions for a new trial and for judgment notwithstanding the verdict; and this judgment was subsequently affirmed on appeal.
History of Second Suit.
As Stafford Co.’s assignee, Merritt filed the present suit in 1966 against Reserve Insurance, grounded upon Stafford Co.’s right of action against Reserve for bad faith and negligent defense of the earlier suit that had resulted in an unsatisfied judgment of $334,000 against Stafford Co. In October 1966 Reserve’s motion for judgment on the pleadings was granted
The cause eventually came to trial on the bad faith count in March 1971. At the trial the circumstances and events connected with the accident and with the conduct of the first suit were reviewed in detail. Merritt’s attorneys testified as expert witnesses in support of Stafford Co.’s cause of action against Reserve that a settlement is often worked out in a case where, as here, the amount of workmen’s compensation lien (estimated at $221,000 at the time of the first trial and $300,000 at the time of the second trial) exceeds the amount of liability insurance coverage. The judge who presided at the trial of the first suit appeared as an expert witness on behalf of plaintiff in the second suit and gave testimony that the credibility of the witness Cox had been low. Other testimony suggested that the defense’s investigation of the accident and defense counsel’s preparation for trial and presentation of its defense in court had been inadequate in view of the potential liability to which Stafford Co. had been exposed.
The jury returned a verdict of $499,000 in favor of Merritt as assignee of Stafford Co.; the court denied a motion for judgment notwithstanding the verdict; and this appeal followed.
Rights Involved in This Cause of Action.
The cause of action on which the judgment is based arises solely out of the rights of Stafford Co. against its insurance carrier, Reserve, and the cause must be еvaluated exclusively in terms of Stafford Co.’s rights as an assured, for the subsequent assignment of those rights to Merritt added nothing to their scope.
{Brown
v.
Guarantee Ins. Co.,
Obligations of the Carrier to Its Assured.
Our starting point in evaluating Stafford Co.’s rights as assured against its carrier, Reserve, is found in the contract of the parties, the automobile liability policy in which for a specified premium Reserve promised coverage to Stafford Co. of its liability for personal injury up to $100,000 for each person and $300,000 for each accident, and coverage for property damages up to $25,000. Under the policy Reserve promised to the limits of its coverage: “To pay on behalf of the insured all sums which the insured
“To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of injury to or destruction of property . . . caused by accident . . .
“[To] defend any suit against the. insured . . . seeking damages on account thereof . . . but the company may make such investigation, nego'tiation and settlement of any claim or suit as it deems expedient; . . .” Under the policy the carrier assumed two different obligations: (1) to pay to the limits of its coverage sums which the insured should become legally obligated to pay as damages for bodily and property injury; (2) to defend any suit against the insured seeking such damages. In connection with these obligations the carrier reserved the right to investigate, negotiate, and settle any claim or suit as it deemed expedient.
Performance of the carrier's first specific obligation, to pay to the limits of its coverage sums the insured should become legally obligated to pay, is not an issue on this appeal and need not.be discussed. Performance of the carrier’s second specific obligation, to defend the insured against any suit seeking damages, is conceded, for the carrier did arrange to defend the insured against suit, and only the manner of that performance has been questioned. The carrier, of course, like any other contractor, was obligated to perform the duties it assumed under the contract in a workmanlike manner, a point we discuss later in this opinion.
But in addition to these two specific" obligations the carrier assumed a third continuing obligation under its liability insurance contract, a duty to deal fairly and in good faith with its assured, the other party to the contract. This duty of good faith and fair dealing between parties to a liability insurance contract is reciprocal, and it amounts to something more than the usual duty of good faith between contracting parties, this for the reason that in limited liability insurance contracts conflicts, of interest between assured and carrier remain endemic to their relationship, and whenever a conflict of interest breaks, out the carrier becomes obligated to protect the interests of the assured equally with its own.
Some general discussion of the relationship between the parties to a typical liability insurance contract may help clarify the duty of good faith and fair dealing that arises when the interests.of the parties come into conflict. Liability insurance policies are universally written with coverages that obligate the carrier to satisfy the assured’s legal liability only within
The varying relationship between assured and carrier under a policy of limited liability insurance may be illustrated by reference to the minimum policy coverage required under California law. Vehicle Code section 16059 specifies the minimum allowable coverage for an automobile insurance policy as $15,000 for one personal injury, $30,000 for one accident, and $5,000 for property damage. An assured who contracts for this minimum policy is covered for liability in damages to those amounts, but has assumed his own risk of liability above those amounts. Suppose a claimant files suit seeking $50,000 damages for personal injuries against an assured who holds a minimum policy. At that point both assured and carrier have a common interest in resisting the suit, for if claimant obtains judgment in the amount he seeks the carrier will become liable for $15,000 and the assured liable for $35,000. The defense against the suit presents no problem of good faith, for the interests of carrier and assured are parallel.
But suppose the claimant offers to settle his suit for $10,000. On the tender of this offer a divergence of interest promptly arises between assured and carrier. From the assured’s point of view any settlement up to the full amount of his coverage ($15,000) is in his interest, for the settlement eliminates the possibility of any liability attaching to him with respect to the share of the risk he has assumed. No matter how remote the possibility may be of a judgment in excess of $15,000, settlement will always be to the interest of the assured—for the settlement will cost him nothing. On the other hand, from the carrier’s point of view settlement of the suit for $10,000 may or may not be to its interest. Mathematically, only if the odds are two to one in favor of claimant’s securing a judgment of $15,000 or more, will it be in the carrier’s interest to settle.
2
Thus, when a settle
Resolution of the conflict of interest between assured and carrier created by a claimant’s offer to settle within policy limits is complicated by the fact that under the insurance contract the carrier retains control over the defense of the lawsuit. Customarily, the carrier has selected and employed counsel who defend the suit on behalf of the assured and has reserved to itself the right to investigate, nеgotiate, and settle the suit against the assured. The assured is not in a position to exercise effective control over the lawsuit or to further his own interests by independent action, even when those interests appear in serious jeopardy. The assured may face the possibility of substantial loss which can be forestalled only by action of the carrier. Thus the assured may find himself and his goods in the position of a passenger on a voyage to an unknown destination on a vessel under the exclusive management of the crew.
The carrier, as well, may find itself in a somewhat comparable position. Although it remains in control of the litigation, it, too, faces the possibility of substantial loss, and it, too, may find itself unable to control the course of the litigation in accordance with its true interests. For example, acceptance of a settlement offer may be actuarially unsound but the carrier may be compelled to such a decision because its assured is underinsured or because its assured faces a remote possibility of very great liability.
When an offer is made to settle a claim in excеss of policy limits for an amount within policy limits, a genuine and immediate conflict of interest , arises between carrier and assured. The normal legal remedy for conflicts in interest is separate representation for the conflicting interests. This remedy, however, possesses only a limited usefulness in the present situation, for while the assured can be advised, as he usually is, that he may employ separate counsel to look after his interests, separate representation usually amounts to nothing more than independent legal advice to the assured, since control of the litigation remains in the hands of the carrier. Control
Nor can the liability of the assured be divided, into separate segments, about which the carrier and the assured may make their separate evaluations and go their separate ways. Patently, the carrier cannot settle its share of the assured’s liability and turn the assured adrift, exposed to a suit for excess liability financed by the carrier’s settlement. Nor can the assured settle the claim for excess liability and abandon the carrier to defend a suit financed by the assured’s settlement. For better or worse, like a married couple, assured and carrier must make the best of each other.
Since the remedy of separate representation is inadequate, and since the remedy of a separate peace, or settlement, amounts to a betrayal of the obligations the parties have assumed under the contract, the courts have been forced to improvise in order to find a workable solution to the problem of conflict of interest. 3 The current status of these efforts confirms the carrier in its control over the litigation, but requires the carrier to consider in good faith the interests of the assured equally with its own and evaluate settlement offers within policy limits as though it alone carried the entire risk of loss.
The California rule governing the carrier’s conduct when conflicts of interest arise from a claimant’s offer to settle a claim within policy limits has been formulated in terms of good and bad faith. In
Comunale
v.
Traders & General Ins. Co.,
Under this rule a carrier in control of litigation which has rejected a settlement in bad faith may become liable to its assured for the resulting loss. In
Crisci
v.
Security Ins. Co.,
California’s appellate courts have considered the problem on several occasions. In
Brown
v.
Guarantee Ins. Co.,
The carrier’s decision must be honest, intelligent, and knowledgeable. The court recognized the carrier’s right to control litigation on which it has assumed primary liability and to protect its own interests in order that
Other cases have tended to repeat in slightly different language the same general propositions on the carrier’s liability for bad faith rejection of a settlement offer within policy limits. For example, in
Ivy
v.
Pacific Automobile Ins. Co.,
We can summarize the gist of these cases as follows: When a claimant offers to settle an excess claim within policy limits a conflict of interest immediately arises between carrier and assured. In such circumstances the carrier is required to evaluate the settlement offer in good faith, and good faith requires it to consider the interests of the assured equally with its own or, as some of the cases have said, to evaluate the settlement offer as though the carrier itself were liable for the full amount of the claim. If the carrier rejects the offer to settle within policy limits without having made an honest, intelligent, and knowledgeable evaluation of. the offer on its merits, then the carrier has acted in bad faith and may become hable to its assured for consequential damages caused by its bad faith rejection.
In making its evaluation only a few benchmarks serve to guide the carrier. The courts agree thаt the carrier must make a rational and knowledgeable assessment of the advisability of accepting or rejecting the settlement offer. The courts also agree that the carrier is not required to predict at its peril the outcome of the suit or the credibility of the witnesses. But beyond these propositions the tracks peter out. In instructing the carrier to consider its own interests equally with those of the assured, the courts have forced the carrier a considerable distance into the field of abstract speculative calculation and required it on occasion to assume hypotheses contrary to fact. For example, the carrier, in evaluating its own interests equally with those of its assured, is compelled to assume that the assured can respond in damages up to the entire amount sought by claimant in his prayer. Therefore, in evaluating a settlement offer tendered to an assured without assets the carrier is theoretically required to assume that its assured can respond in damages to the full amount of the 'claim.
(Kinder
v.
Western Pioneer Ins. Co.,
What the courts appear to require when they say that the carrier which receives an offer to settle an excess claim within policy limits must evaluate its own interests- equally with those of its assured, is that the carrier give careful and serious consideration to the interests and position of the assured in determining whether to accept or reject the settlement offer. The carrier cannot exclusively preoccupy itself with its own interests but must also weigh the real interests of the assured. An assured without assets has little at stake, an assured with some assets something at stake, and an assured with large assets a great deal at stake. In each instance the carrier is required to give serious and careful consideration to the true position and interests of its assured. Obviously, these interests will vary from person to person. 4
At this point we recall that the problem is one of conflict of interest, that normally the interests of carrier and assured are parallel, and that only with the tender of a settlement offer within policy limits do the interests of the assured and the carrier diverge. If a settlement offer is made in excess of policy limits, what obligations or duties then fall upon the parties to the policy? Suppose in our hypothetical case of the $15,000 minimum policy and the $50,000 claim, claimant makes an offer to settle for $30,000. If the offer is accepted, the carrier’s loss will be $15,000 and the assured’s loss will be $15,000. Obviously, the first step is for the carrier on the tender of such an offer to communicate the offer to the assured. If the assured does not have the resources to contribute $15,000 to the settlement, nothing the carrier can do will effect this particular settlement, and no conflict of interest arises between carrier and assured. But suppose the claimant then offers to settle his claim for $17,000 and suppose further the assured is willing and able tо pay $2,000 as his contribution to the settlement of the claim. The issue thus posed is whether in settlement of the claim for $50,000 the carrier will pay the full amount of its policy, $15,000, to enable the assured to settle a potential liability of $35,000 for $2,000. In this situation the conflict of interest is real, and its solution cannot be reduced to mechanical formula.
In applying these factors it was said in
Davy
v.
Public National Ins. Co.,
Cause of Action for Bad Faith.
With this background in conflict of interest we turn to the facts of the case at bench. Merritt filed suit against Stafford Co. for $400,000 damages for personal injuries, and on the day of trial he increased his prayer for damages from $400,000 to $650,000. At no time did he make any offer to settle, nor did he or his counsel or his compensation insurance carrier ever advance any suggestion that settlement could be profitably discussed. The evidence shows that the workmen’s compensation carrier’s hen against any recovery by Merritt for personal injuries was estimated at $300,000, that at the time of the first trial $76,000 had actually been paid out under workmen’s compensation and a reserve of $145,000 had been established for future payouts. The limit of Stafford Co.’s coverage for a single personal injury under its policy with Reserve was $100,000. Stafford Co.’s net worth at all times was less than $100,000, and at the time of the first trial it approximated $40,000. Although J. A. Stafford insisted up to and after the time of trial that Stafford Co. had an excess policy of liability insurance, at no time did he produce an excess policy or inform anyone what carrier had underwritten such a poliсy. Apparently all persons connected with this litigation have assumed throughout that the driver, Bernal, an added insured under Reserve’s policy, is judgment proof, and therefore his status is not a factor of consequence in the litigation.
In our view these facts conclusively demonstrate that the interests of carrier and assured at all times were parallel and not divergent, that nothing occurred to create any conflict of interest between them or to suggest the existence of any factors, which, if acted upon, might have created some conflict of interest. Since no offer to settle was ever made, either within policy limits (the normal prerequisite for conflict of interest) or above policy limits but within feasibility limits of the assured’s resources, we conclude that no conflict of interest ever developed between assured and carrier, and therefore the issue of the carrier’s bad faith in relation to its assured never arose.
Stafford Co.’s assignee cites several extraneous factors as justification for the absence of any settlement offer and as a basis for holding Reserve
The second factor cited in support of Stafford Co.’s claim against Reserve for bad faith refusal to settle is Reserve’s failure to initiate settlement overtures to Merritt and his compensation insurance carrier. It is theorized that if Reserve had made such overtures the case could have been settled to Stafford Co.’s satisfaction. This theory is supported by no evidence whatsoever. Up to the time of trial Merritt’s and Sterling Transit’s prayer remained at $400,000 for damages for personal injuries and $24,000 for property damages. No invitation was ever tendered by them to Stafford Co. or to defense counsel or to Reserve to make a settlement offer. On the day of trial Merritt increased his prayer from $400,000 to $650,000. Reserve was periodically and consistently advised by defense сounsel that settlement was impossible in view of the size of the workmen’s compensation hen ($300,000). No request to initiate settlement discussion was ever made by Stafford Co. to Reserve. In this connection we note that Stafford Co. brought its own suit for property damage against Sterling Transit, the owner of the. truck Merritt had been driving, an action that suggested that Stafford Co. agreed with defense counsel’s evaluation of the case as one in which fault rested on the opposing party.
The third factor cited by Stafford Co.’s assignee to support Reserve’s liability to Stafford Co. for bad faith refusal to settle is Reserve’s failure
We conclude that none of these extraneous factors has any bearing on Stafford Co.’s asserted cause of action against Reserve for bad faith refusal to settle. No settlement offer was ever made, either within policy limits, or within policy limits supplemented by the assured’s net worth. No demand for settlement was ever presented by the assured to the carrier. (Cf.
Garner
v.
American Mut. Liability Ins. Co.,
The Pleading of Negligence.
The cause of action of Stafford Co.’s assignee for negligence was dismissed in advance of trial by an order granting judgment on the pleadings. In pertinent part, this count charged Reserve with negligent defense of the Merritt v. Stafford lawsuit as follows:
“II
“Defendants [Reserve] . . . handled the defense of J. A. Stafford Co. and Salvador Bernal in the case of Merritt vs. Stafford ... in a negligent manner and without exercising due care and without due regard for the best interests of J. A. Stafford Co. and Salvador Bernal in that said defendants failed to properly investigate and prepare for said litigation; failed to properly undertake, initiate, entertain or pursue discussions with plaintiff [Merritt] for the disposition and settlement of said case at any stage of the proceeding prior to judgment; repeatedly and erroneously misled J. A.Stafford Trucking Co. into a false sense of security and resulting inaction by assuring it that its interests and the interests of its employee Salvador Bernal were being adequately protected; and failed to properly protect the interests of J. A. Stafford Trucking and Salvador Bernal in the trial, appeal and satisfaсtion of said action.”
Basically, this count charged Reserve with negligent handling of the defense in the case of Merritt v. Stafford in two respects: (a) negligent failure to initiate settlement discussions; (b) negligent conduct of the litigation (investigation, preparation, trial, appeal, and satisfaction). In entering judgment on the pleadings in favor of Reserve on this count, the trial court in effect determined that the count, as pleaded, failed to set forth a cause of action against Reserve.
With respect to the first charge, negligent failure to initiate settlement discussions, we have seen from our review of the California cases that actionable failure to settle must encompass bad faith, that negligence alone is insufficient to support the charge. As the court said in rejecting the negligence test in
Brown
v.
Guarantee Ins. Co.,
The second charge in this count is negligent handling and conduct of the defense in the case of Merritt v. Stafford. Thе charge, however, was directed against Reserve and not against the independent trial counsel who conducted and handled the defense of the lawsuit. Plaintiff’s theory on this aspect of the case is that trial counsel acted as agents for their employer, Reserve, and the employer may be held liable for the negligent conduct of its agents in defending the lawsuit.
We do not accept the claim that vicarious liability falls on one who retains independent trial counsel to conduct litigation on behalf of a third party when retained counsel have conducted the litigation negligently.
(Estate of Barbikas,
We confine our consideration to the circumstances of this case, wfiere the carrier employed independent trial counsel to conduct the defense of the lawsuit for the insured. (Cf. Rest. 2d Agency, § 223, com. a; § 250, com. a.) Thus in
Otten
v.
San Francisco Hotel etc. Assn., supra,
Reserve, of course, remains liable for the negligent performance of its own duties. Under the policy Reserve assumed three principal duties in relation to the assured: (1) to make immediate inquiry into the facts of any serious accident as soon as practicable after its occurrence; (2) on the filing of suit against its assured to employ competent counsel to represent the assured and to provide counsel with adequate funds to conduct the defense of the suit; (3) to keep abreast of the progress and status of the litigation in order that it may act intelligently and in good faith on settlement offers. The conduct of the actual litigation, including the amount and extent of discovery, the interrogation, evaluation, and selection of witnesses, the employment of experts, and the presentation of the defense in court, remains the responsibility of trial counsel, and this is true both on plaintiff’s side and on defendant’s side of the case.
In our view the trial court correctly concluded that the negligence count, in its then form, did not set forth any breach of duty by Reserve of the obligations with which it was chargeable. Plaintiff was given ample time by the court to amend its pleading of the negligence count. Plaintiff neither objected to the court’s ruling nor moved to amend its pleading, and in November 1966 the court ordered the negligence count dismissed. Trial of the action did not take place until 1971. From this chronology it is apparent that plaintiff chose to rely wholly on the bad faith count and not to pursue the negligence count against Reserve.
(Hardy
v.
Admiral Oil Co.,
Other Matters—Appearance of Impropriety.
For future guidance of bench and bar we discuss one other feature of the case.
At the second trial there appeared as an expert witness on plaintiff’s behalf the judge who had presided over the trial of the first suit, which had resulted in a judgment on behalf of plaintiffs for $434,000 and $21,000, respectively. The judge testified that in his expert opinion, Cox, a witness produced by the defense at the earlier trial, had not been a persuasive witness, an opinion that tended to support an inference that the defense had not been skillfully handled.
A judge should avoid not only impropriety but the appearance of impropriety. Canon 4 of the Canons of Judicial Ethics adopted by the Con
We think it prejudicial to one party for a judge to testify as an expert witness on behalf of the other party with respect to matters that took place before him in his judicial capacity. In such instance the judge appears to be throwing the weight of his position and authority behind one of two opposing litigants. The Evidence Code absolutely prohibits the judge presiding at the trial of an action to testify as a witness over the objection of a party. (
We conclude that the trial court erred in permitting the judge to testify as an opinion witness with respect to matters that had come before him in his judicial capacity.
Roth, P. J., and Compton, J., concurred.
A petition for a rehearing was denied November 28, 1973, and the petition of the plaintiff and appellant for a hearing by the Supreme Court was denied January 24, 1974. Tobriner, J., Mosk, J., and Sullivan, J., were of the opinion that the petition should be granted.
Notes
The order granting judgment on the pleadings is not appealable.
(Adohr Milk Farms, Inc.
v.
Love,
Approximate odds may be calculated by simple arithmetic. If a carrier defending three lawsuits under $15,000 policy limits settles each of them for $10,000, it will pay out $30,000. If, instead, it goes to trial on these three lawsuits, wins one and
For discussions of the generally unsatisfactory nature of all proposed solutions, see Keeton, Liability Insurance and Responsibility for settlement, 67 Harv.L.Rev. 1136; Peterson, Excess Liability, etc., 18 Stan.L.Rev. 475; An Insurance Company’s Duty to Settle: Qualified or Absolute?, 41 So.Cal.L.Rev. 120.
Consider in the present suit the position of Bernal, the driver of the Stafford Co. truck. An unsatisfied judgment of $334,000 remains outstanding against him. As an insured and third-party beneficiary under the policy he is owed the same general obligations that are owed to Stafford Co., the assured. Yet his interests have been ignored by all parties to the present litigation, an attitude that undoubtedly mirrors his status as a judgment debtor without assets whose damages as a result of the judgment were minimal.
We note that the jury instructions on proximate cause in the case relied on this language from our prior'opinion. When used as jury instructions on proximate cause, we think this language tends to be somewhat misleading.
(Brown
v.
Guarantee Ins. Co.,