In 21st Century Insurance Company v. Superior Court (Tapia), 2015 WL 5285822, a California appeals court confirmed an insurance company defending its insured cannot be bound by a pre-trial stipulated judgment entered into by its insured without the insurer’s consent.
The insured, a teenager living with his aunt and grandmother, was sued by heirs of a passenger killed in an automobile accident in which the insured was driving his grandfather’s car. The insured had $100,000 in liability coverage under an automobile policy issued by 21st Century Insurance Company (“21st Century”) to his sister. The insured was listed as a driver and the car was a covered vehicle.
Prior to his death, the passenger and his mother (collectively “Plaintiffs”) sued the insured. 21st Century offered to settle the action for the policy limits of $100,000. Plaintiffs rejected 21st Century’s $100,000 policy limits offer because plaintiffs believed the insured might also be covered under two additional 21st Century policies issued to the insured’s aunt and grandmother, each providing $25,000 in coverage. Plaintiffs made a settlement offer of $150,000 to the insured’s counsel, which was not accepted within the time provided. 21st Century contended it never received the offer despite evidence to the contrary.
Shortly thereafter, 21st Century offered the “full” $150,000 to settle the case against its insured, which was rejected by plaintiffs’ counsel. Plaintiffs’ counsel served a Code of Civil Procedure section 998 offer in the amount of $3,000,000 for the passenger and $1,500,000 for his mother. 21st Century warned the insured it would agree to be bound if the insured accepted the offer. The insured ignored the warning and agreed to the entry of a stipulated judgment for the amounts demanded by plaintiffs. 21st Century paid $150,000 plus interest to the plaintiffs—the amount represented by all three 21st Century policies. The insured then assigned any rights he had against 21st Century to plaintiffs. This assignment and agreement included plaintiffs’ promise not to execute on the judgment against the insured so long as the plaintiff passenger complied with his obligations.
A bad faith action followed. 21st Century moved for summary judgment on the following grounds: 1) the insured’s settlement without its consent vitiated any claim in excess of policy limits; and 2) 21st Century had no duty to defend or accept the $150,000 demand, because there was no coverage under the two $25,000 policies issued to his aunt and grandmother. The trial court denied 21st Century’s summary judgment. This denial was reversed on appeal.
The Court of Appeal first cited Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718 for the rule that “a defending insurer cannot be bound by a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment.” Hamilton held the stipulated judgment “carries no weight in the bad faith action” bought by the assignee, and “moreover, plaintiffs cannot show [the assignor/defendant] suffered any damages as a result of the [insurer’s] breach.” The Court of Appeal noted the crucial element in the Hamilton ruling was the lack of a judgment rendered after an adversarial trial given the potential for collusion. Hamilton indicated the insured may assign any bad faith claims to the plaintiff in exchange for a covenant not to execute; the assignment would become operative after trial and in the event an excess judgment had been rendered. The Court of Appeal made clear the Hamilton rule only applied where an insurer has accepted coverage and is carrying out its duty to defend. If an insurer refuses to defend, the insured is free to enter into a non-collusive settlement and then maintain or assign an action against the insurer for breach of the duty to defend.
Plaintiff argued 21st Century breached its duty to defend by denying coverage under the two $25,000 policies. Plaintiffs argued that because 21st Century failed to defend under those policies, the insured could enter into a stipulated judgment with plaintiffs that would bind the insurer. The Court of Appeal noted 21st Century defended under the policy with the highest coverage. The Court of Appeal stated even if 21st Century had a duty to defend under all policies, its partial breach of that duty cannot have affected the defense offered.
Finally, the Court of Appeal found the undisputed facts demonstrated 21st Century did not have a duty to defend under either of the $25,000 policies. Those policies would only have covered additional autos “not owned nor available for regular use by you, a relative or a resident of the same household in which you reside.” Testimony revealed the grandfather’s car was freely available to the insured form the time he was first licensed. Thus, there was no coverage under those policies and, consequently, 21st Century was not in breach of any duty defend.
21st Century reaffirms an insurer’s protection against a stipulated judgment agreed to by an insured without the insurer’s consent. However, if an insurer refuses to defend, an insurer is free to enter into a settlement and then maintain or assign an action against the insurer for breach of the duty to defend. In the subsequent action, the amount of the settlement will be presumptive evidence of the amount of the insured’s liability.
ABOUT THE AUTHOR
Kevin Rogers is a graduate of University of San Diego School of Law. He specializes in general liability, professional liability, and business litigation. Contact him at firstname.lastname@example.org.
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