California Appellate Court Reaffirms Protection Against Stipulated Judgments

In 21st Century Ins. v. Superior Court (No. E062244; filed 9/10/15), a California appeals court confirmed that a defending insurer is not bound by a stipulated judgment entered without its consent, and the fact that the insurer has denied coverage under additional policies issued to household members that are contended to provide coverage does not render the defense less effective or establish a breach sufficient to circumvent the rule against stipulated judgments.

In 21st Century, the insured was sued by heirs of a passenger killed in an accident while the insured was driving his grandfather’s car. He was admittedly covered by a $100,000 policy issued to his sister, on which he was listed as a driver and the car was a covered vehicle. However, 21st Century denied coverage under two $25,000 polices issued to other household members and defended the personal injury action solely under the sister’s policy. It offered the $100,000 limit to settle the case but the plaintiffs, convinced that there was coverage under the other two policies, demanded $150,000.

21st Century disputed being advised of the offer and it was not accepted within the time provided, although 21st then belatedly attempted to accept. But the acceptance was rejected and the plaintiffs, believing that the policy had been “opened,” served a statutory Code of Civil Procedure section 998 offer to compromise for $3 million. 21st Century notified the insured that it would not agree to be bound if he accepted the offer, which he nonetheless did. A stipulated judgment was entered and the insured assigned his rights against 21st Century to the plaintiffs, receiving a covenant not to execute against him personally. 21st Century then paid the $150,000 limits of all three policies.

In the bad faith lawsuit that followed, 21st Century argued that it had defended and was not bound by a stipulated judgment under Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718. In addition, 21st Century argued that it had no duty to defend or accept the $150,000 demand, because there was no coverage under the two $25,000 policies issued to other household members.

The plaintiffs responded that Hamilton was not dispositive, because 21st Century was in breach of the duty to defend by having denied coverage under the two $25,000 policies. The plaintiffs cited Risely v. Interinsurance Exchange of the Auto Club (2010) 183 Cal.App.4th 196, which had followed Wint v. Fidelity & Casualty Co. (1973) 9 Cal.3d 257, in holding that the insurer’s refusal to defend under one of two policies was a breach because it potentially increased the insured’s exposure to personal liability and denied the insured his right to have the insurer accept a reasonable settlement demand of the claim within the policy limits of the second policy.

But the 21st Century court found those cases distinguishable. In particular, the 21st Century court pointed out that both Risely and Wint had involved situations where the limits under the denied policies were significantly higher than the limits of the defending policies. However:

“In this case not only did petitioner defend under the policy with the highest coverage, the total available had it accepted the defense under all three policies was not significantly higher. There is no reason to suppose that the defense offered under a $100,000 policy would be significantly less effective than that under $150,000 of coverage. Thus, the situation is quite different from either Risely ($50,000 vs. $300,000 and a total of $350,000 both available as defense costs and at risk from the same insurer) or Wint (a $10,000 policy as against a $100,000 policy, totaling $110,000). That is, even if 21st Century had a duty to defend under all policies, its partial breach of that duty cannot have affected the defense offered.”

Moreover, the 21st Century court said that the result was also mandated because there was no coverage under the two $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” and testimony had revealed that the grandfather’s car was freely available to the insured from 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 to defend or settle.

Finally, the court rejected an argument that 21st Century had acted in bad faith by neglecting to notify the insured of the $150,000 offer, to permit him the opportunity to fund the difference himself and avoid the excess judgment. But the 21st Century court said that was irrelevant, because the judgment had been stipulated without a trial. The 21st Century court said that “if Tapia was the victim of insurer misconduct, he had the option of assigning his rights against 21st Century after trial and judgment. And at trial, we point out, both Tapia’s liability and plaintiff’s damages would have been established after active litigation. Instead, for reasons unclear, Tapia and plaintiff elected to settle without a trial and judgment after verdict.”

“[T]he crucial element is the lack of a judgment rendered after an adversarial trial. The potential for collusion in the circumstances involved is obvious. (See Safeco Ins. Co. v. Superior Court (1999) 71 Cal.App.4th 782, 787.) But we note that Hamilton is not unsympathetic to the plight of an insured exposed to the risk of a judgment vastly in excess of policy limits. Agreeing with statements in Safeco, Hamilton indicates that the insured may assign any bad faith claims to the plaintiff in exchange for a covenant not to execute; the assignment will become operative after trial and in the event that an excess judgment has been rendered. [] The vice in Hamilton, as here, was that the insured stipulated to a judgment which the claimant, plaintiffs in this action, relied upon to prove damage.” And according to the 21st Century court, “Hamilton bars the use of the stipulated judgment to prove Tapia’s damages.”

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September 14, 2015