Interinsurance exchange of the automobile club of southern california

INTERINSURANCE EXCHANGE OF THE AUTOMOBILE CLUB OF SOUTHERN CALIFORNIA v. ANDUJO

Court of Appeal, Second District, Division 3, California.

INTERINSURANCE EXCHANGE OF THE AUTOMOBILE CLUB OF SOUTHERN CALIFORNIA, Petitioner, v. THE SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF LOS ANGELES, Respondent; Victor M. ANDUJO, Real Party In Interest.

No. B020040.

Decided: November 26, 1986

Shield & Smith and Aaron J. Weissman, Los Angeles, for petitioner. No appearance for respondent. Lewis, Marenstein & Kadar, Los Angeles, and Thomas L. Hoegh, for real party in interest.

Petitioner Interinsurance Exchange of the Automobile Club of Southern California (“the Auto Club”) seeks a writ of mandate directing respondent Superior Court of the County of Los Angeles to vacate its order of March 26, 1986, overruling the Auto Club's demurrer to the First Amended Complaint of real party in interest Victor M. Andujo (Andujo), and to enter an order sustaining the demurrer. The issue raised by the petition is whether a third party claimant may bring a bad faith action against an insurer without there first having been a final determination of the insured's liability. We hold that the third party claimant may bring such an action, and deny the petition.

FACTS AND PROCEDURAL HISTORY 1

The essential facts are not in dispute. In his First Amended Complaint for Bad Faith Damages,2 Andujo alleged that on or about March 22, 1985, he was involved in an automobile accident with the Auto Club's insured, Annabel Ramirez, whose vehicle negligently struck the rear of his vehicle. Following an unsuccessful attempt to secure full payment from the Auto Club for damage to his vehicle caused by the accident, Andujo advised the Auto Club of his decision to take the matter to small claims court, and proceeded to file a small claims action against Ramirez, her husband, and the Auto Club. On or about August 9, 1985, Andujo obtained a judgment in the small claims action against Mr. and Mrs. Ramirez, and the Auto Club for the full value of his property damage.3 Andujo alleged that the Auto Club breached its statutory duty as set forth in subdivision (h) of Insurance Code section 790.03,4 by failing “to adopt and implement reasonable standards for prompt investigation and processing of claims ․” (subd. (h)(3)), failing to attempt “in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear” (subd. (h)(5)), and failing “to provide promptly a reasonable explanation of the basis relied on ․ for the denial of a claim or for the offer of a compromise settlement” (subd. (h)(13)).

The Auto Club demurred to the First Amended Complaint on the ground, inter alia, that a third party bad faith action may not be maintained following a small claims judgment against the insured, as a small claims judgment does not constitute a “conclusion” within the meaning of Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329. Andujo filed opposition to the demurrer, which was heard and overruled on March 26, 1986. The present petition followed.

CONTENTIONS

The Auto Club contends, in substance and effect, that the trial court erred in overruling its demurrer to the First Amended Complaint in that the judgment of the small claims court was not a “conclusion” for the purpose of permitting the bringing of a subsequent bad-faith action, because it did not constitute a final determination of the liability of the insured which, according to the Auto Club, is a condition precedent to commencing a bad-faith action against an insurer by a third party claimant.

DISCUSSION

A Small Claims Court Action Is Concluded When Its Judgment Becomes Final

It is beyond argument that a small claims court civil action is concluded when its judgment becomes final. Accordingly we hold that in the case at bench the final judgment of the small claims court concluded the small claims court civil action, within the meaning of Royal Globe, so as to permit the commencement and trial of the bad-faith action.

A Third Party Claimant May Commence And Prosecute A Bad Faith Action Against An Insurer Under The Unfair Claims Settlement Statute Without There First Having Been A Final Determination Of The Insured's Liability

The Auto Club's fundamental contention is that a final determination of the insured's liability is a condition precedent to the maintenance of a third party bad faith action against the insurer. We hold that it is not.

In Royal Globe it was held for the first time that a third party may sue an insurer for violating the duties imposed by Insurance Code section 790.03. However, the court also held that “plaintiff may not sue both the insurer and the insured in the same lawsuit” (Royal Globe, supra, 23 Cal.3d at p. 891, 153 Cal.Rptr. 842, 592 P.2d 329), and “that the third party's suit may not be brought until the action between the injured party and the insured is concluded.” (Id., at p. 884, 153 Cal.Rptr. 842, 592 P.2d 329 .) The Royal Globe court stated three reasons for this limitation: (1) a joint trial against the insured and the insurer “would obviously violate both the letter and spirit” (id., at p. 891, 153 Cal.Rptr. 842, 592 P.2d 329) of Evidence Code section 1155,5 which was obviously designed to prevent the prejudicial use of evidence of liability insurance in an action against an insured (23 Cal.3d at p. 891, 153 Cal.Rptr. 842, 592 P.2d 329); (2) “unless the trial against the insurer is postponed ․ the defense of the insured may be seriously hampered by discovery initiated by the injured claimant against the insurer” (id., at p. 892, 153 Cal.Rptr. 842, 592 P.2d 329); and (3) “damages suffered by the injured party as a result of the insurer's violation of [section 790.03] may best be determined after the conclusion of the action by the third party claimant against the insured.” (Ibid.)

None of the reasons set forth in Royal Globe mandates final determination of the insured's liability, in the res judicata or collateral estoppel sense, prior to institution of a third party bad faith action against the insurer, although the court did state, in introducing the second factor: “Moreover, unless the trial against the insurer is postponed until the liability of the insured is first determined․” (Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d at p. 892, 153 Cal.Rptr. 842, 592 P.2d 329.)

Unfortunately, this language formed the basis of a misinterpretation of Royal Globe in Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 891, 162 Cal. Rptr. 115, in which the court stated: “However, even under the reasoning in Globe, ‘․ the third party's suit may not be brought until the action between the injured party and the insured is concluded ․ [and] liability of the insured is first determined․’ (Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d at pp. 884, 892 [153 Cal.Rptr. 842, 592 P.2d 329] .” (Ibid.) That misinterpretation was repeated and perpetuated by Nationwide Ins. Co. v. Superior Court (1982) 128 Cal.App.3d 711, 714, 180 Cal.Rptr. 464 (“However, the [Royal Globe ] court also held that the injured third party may not institute such an action until a judgment establishing the liability of the insured has been secured”), and in the holdings of Williams v. Transport Indemnity Co. (1984) 157 Cal.App.3d 953, 958, 203 Cal.Rptr. 868, and Heninger v. Foremost Ins. Co. (1985) 175 Cal.App.3d 830, 833–834, 221 Cal.Rptr. 303.

Williams held that Royal Globe “reasonably has been interpreted as requiring the final determination of an insured's liability as a condition precedent to the maintenance of an action against the insurer for the violation of Insurance Code secton 790.03, subdivision (h)(5)․” (157 Cal.App.3d at p. 962, 203 Cal.Rptr. 868.) Heninger stated “that no viable cause of action can be pled for an alleged violation of [subdivision (h) of section 790.03] until the twin requirements of conclusion of the dispute between the injured party and the insured, and final determination of the insured's liability are alleged.” (175 Cal.App .3d at p. 834, 221 Cal.Rptr. 303; emphasis in original.)6

The Auto Club contends that the judgment of the small claims court in the action by the injured third party, Andujo, against its insured, Ramirez, does not constitute a final determination of its insured's liability in that the Auto Club cannot be collaterally estopped from raising the issue of liability in the bad faith action. The Auto Club cites Sanderson v. Niemann (1941) 17 Cal.2d 563, 110 P.2d 1025 and City and County of San Francisco v. Small Claims Court (1983) 141 Cal.App.3d 470, 190 Cal.Rptr. 340 as authority for its position.

That contention is correct, but it is not relevant to the decision in this proceeding.7 Royal Globe does not require a final determination of the liability of the insured as a condition precedent to commencing a bad faith action against an insurer by a third party. What Royal Globe does require is (1) that a civil action by the injured third party against the insured, if there is such an action, shall be concluded before the bad faith action by the injured third party against the insurer may be tried, and (2) that such plaintiff may not sue both the insurer and the insured in the same action.

What the unfair claims settlement statute requires is that an insurer attempt “in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.” (§ 790.03, subd. (h)(5).) A cause of action arises under the statute when an insurance company does not attempt in good faith to effectuate a settlement of a claim “in which liability has become reasonably clear.” (Ibid.) The statute does not require that a judgment on the claim shall have been entered against the insured in the third party's favor or that the insurer shall have admitted liability. Royal Globe determined only that the third party's action against the insurance company should not be tried in conjunction with the third party's suit against the insured and that the underlying action be concluded before the trial of the bad-faith action; it did not require that liability had been finally settled before the bad faith action could be tried.

We hold that a civil action between an insured and a third party claimant is “concluded” within the meaning of Royal Globe when the judgment of the court in which the civil action was commenced is final. It follows that a civil action in a small claims court is “concluded”, as required by Royal Globe, when its judgment becomes final. When the underlying action has been in the small claims court the questions of the liability of the insured, and whether the insurer's conduct violated any of the requirements of subdivision (h) of section 790.03, are matters to be determined in the trial of the bad faith action.

The Auto Club Admitted Liability Of Its Insured

There is another reason why the instant petition should be denied. “A demurrer admits all material and issuable facts properly pleaded ․ provisionally for the purpose of testing the question of law raised by the demurrer.” (McHugh v. Howard (1958) 165 Cal.App.2d 169, 174, 331 P.2d 674; Arnolds Management Corp. v. Eischen (1984) 158 Cal.App.3d 575, 577, 205 Cal.Rptr. 15.) In his first amended complaint, Andujo alleged “[t]hat on or about March 22, 1985 Plaintiff was involved in an accident with Ananbel [sic.] Ramirez wherein her vehicle negligently collided with a vehicle owned and occupied by Plaintiff,” and that “[a]s a result of said accident, Plaintiff's vehicle sustained damages.” The Auto Club, in seeking relief via demurrer, admitted liability of the insured for purposes of the demurrer.

DECISION

The petition for writ of mandate is denied. Real party in interest is awarded costs in this proceeding.

FOOTNOTES

1.  In accordance with California Rules of Court, rule 12(a), we have ordered the entire superior court file transmitted to us to augment the record on appeal.

2.  Andujo named as defendants the Auto Club, Gordon L. Aubrey, and Does 1 through 50.

3.  We must presume that the court's official duty was regularly performed (Evid.Code, § 664) and, therefore, that the court had jurisdiction over the Auto Club, through proper service. Moreover, counsel for the Auto Club conceded, in response to our inquiry at oral argument, that the Auto Club had been so served.

4.  All sectional references are to the Insurance Code unless otherwise specified.

5.  Evidence Code section 1155: “Evidence that a person was, at the time a harm was suffered by another, insured wholly or partially against loss arising from liability for that harm is inadmissible to prove negligence or other wrongdoing.”

6.  In Rodriguez v. Fireman's Fund Ins. Co. (1983) 142 Cal.App.3d 46, 53, 190 Cal.Rptr. 705, the definition of the term “concluded” was expanded to include a situation where the liability of the insured is admitted and the underlying lawsuit is settled and dismissed with prejudice.The questions whether an admission of liability of the insured is a requirement for a bad faith action against the insurer, and whether a plaintiff must reserve the right to sue the defendant's insurance company in settling an action against the insured are presently pending before our Supreme Court in Nelson v. GAB Business Services, Inc. (L.A. 32223, formerly 179 Cal.App.3d 610, 224 Cal.Rptr. 595); Moradi–Shalal v. Fireman's Fund Ins. Companies (L.A. 32222, formerly 181 Cal.App.3d 136, 226 Cal.Rptr. 333); and Appleton v. Chubb Group of Insurance Companies (L.A.32221).

7.  In the present case, where the Auto Club was itself named as a defendant in the small claims action, and served therein, but failed to challenge the propriety of its joinder as a defendant, there is a question whether it is bound by the small claims judgment determining liability of the insured. We need not, and do not, address this question.

DANIELSON, Associate Justice.

KLEIN, P.J., and ARABIAN, J., concur.

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