Opinion
NOT TO BE PUBLISHED
Alameda County Super. Ct. No. RG07348144
Banke, J.
I. Introduction
It is established California law that an insurance carrier has no “good faith” duty to accept a policy limits settlement offer for the release of only one of multiple defendants insured under the same policy. The fundamental issue in this appeal is whether a policy limits offer to compromise made pursuant to Code of Civil Procedure section 998 for entry of a policy limits judgment against only one of several insureds, is qualitatively different from a settlement offer made directly to the insurer, such that it imposes a “good faith” duty on the insurer to either advise acceptance of the section 998 offer or provide separate counsel for the insured to whom the section 998 offer is made. We conclude it is not and affirm the judgment.
All further statutory references are to the Code of Civil Procedure unless otherwise indicated.
II. Background
This action has its genesis in an automobile accident that occurred on April 6, 2004. Anson Tsai (Anson) was driving a car owned by his parents, Jen-Yih and Chunmei Tsai (the Tsais), when he rear ended plaintiff and appellant Steven Paul Kauffman (Kauffman). Anson and the Tsais were insured under an automobile liability policy issued by California State Automobile Association (CSAA) with limits of $100,000 per person and $300,000 per incident.
The insurance policy is not part of the record on appeal.
Kauffman filed suit against Anson and the Tsais one year later, in April 2005. In his first amended complaint, also filed in April 2005, Kauffman alleged Anson negligently operated the vehicle, falling asleep while driving, and failing to stop when Kauffman, driving the vehicle ahead of him, stopped. As against the Tsais, Kauffman asserted causes of action for negligent entrustment of their car to Anson and vicarious liability. Kauffman pleaded special damages exceeding $100,000. CSAA acknowledged the Tsais’ tender of defense, and retained the law firm of Bennett, Samuelson, Reynolds & Allard (the Bennett firm) to represent all three insureds.
On our own motion, we take judicial notice of the date the original complaint was filed. We also grant CSAA’s request for judicial notice of Kauffman’s first amended complaint in Alameda County case No. RG05207926. (Evid. Code, § 452, subds. (c)-(d).)
Five months later, in September 2005, Kauffman made a policy limits section 998 offer to compromise to Anson alone. CSAA made a counteroffer to settle the entire action, against Anson and the Tsais, for the $100,000 policy limits. Kauffman was not interested, and rejected the counteroffer.
On May 11, 2006, the Tsais moved for summary adjudication of Kauffman’s negligent entrustment claim. Kauffman opposed the motion, arguing the Tsais had prior notice Anson had three traffic violations, one accident, and some parking tickets. He also maintained the Tsais knew of two prior occasions on which Anson pulled over to the side of the road to rest because he was sleepy. The trial court granted the Tsais’ motion on July 28, 2006, and they subsequently settled with Kauffman for $15,000, the statutory limits of liability under Vehicle Code section 17151. CSAA paid the settlement amount, and the Tsais were dismissed from the action.
We also grant CSAA’s request for judicial notice of Kauffman’s opposition to the Tsais’ motion for summary adjudication of the negligent entrustment cause of action. (Evid. Code, § 452, subds. (c)-(d).)
One year later, in July 2007, Kauffman and Anson reached a settlement on the following terms: A stipulated judgment would be entered against Anson for $350,000, plus prejudgment interest. CSAA would immediately pay $85,000 to Kauffman (the balance of the $100,000 policy proceeds). Anson would assign any claims against CSAA arising from its handling of the personal injury action to Kauffman. Anson would pursue any claims against David Samuelson and the Bennett law firm for their handling of the defense of the personal injury action. Kauffman, in his anticipated action against CSAA, would not seek emotional distress or punitive damages. Pending any recovery against the lawyers and CSAA, Kauffman would not execute on the stipulated judgment against Anson. Kauffman would look to any recovery in the anticipated lawsuits against the lawyers and CSAA for amounts Anson owed on the judgment above the policy proceeds. And, following the conclusion of those lawsuits and collection of any judgments therein, Kauffman would file a satisfaction of judgment in favor of Anson.
Presumably, this was because emotional distress and punitive damages claims are not assignable. (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 942.)
Anson, pursuant to the settlement agreement, filed a malpractice action in September 2007, against several individual attorneys and the Bennett firm. The defendants in that action moved for and were granted summary judgment, and judgment was entered against Anson on February 17, 2009. Anson filed a notice of appeal, which was subsequently dismissed at his request on May 1, 2009.
The court, on its own motion, takes judicial notice of the summary judgment entered in the legal malpractice action and documents filed in the appeal from that judgment (case No. A124580). (Evid. Code, § 452, subds. (c)-(d).)
Kauffman, in turn, as assignee of Anson’s claims against CSAA, filed this “bad faith” action in September 2007. He filed a first amended complaint in February 2008, to which CSAA demurred. The trial court sustained the demurrer with leave to amend.
Kauffman filed a second amended complaint in June 2008, revising his causes of action for breach of the duty of good faith and fair dealing and breach of contract, and adding a cause of action for constructive fraud. In connection with his bad faith and breach of contract claims, Kauffman alleged CSAA “directed” defense counsel “to reject the [section 998] offer.” He further alleged Anson and the Tsais “acquiesced in the decision” to reject the section 998 offer to Anson, but that “[s]aid ‘consent’ was obtained without a full disclosure of the separate and different consequences to the driver and owners with respect to the litigation and insurance issues....” Kauffman alleged it was not until February 2006, that CSAA advised the Tsais of “the serious conflicts of interest inherent in the case... [and] provide[d] separate counsel to represent the personal interests of the Tsais.” In connection with the constructive fraud claim, Kauffman alleged CSAA and its agents “misrepresented the effect of a rejection of the [section] 998 offer,” and Anson and the Tsais relied on that “misinformation... to their detriment.”
CSAA demurred to the second amended complaint on several grounds, including that rejecting a policy limits settlement demand made to only one of several insureds does not violate the implied covenant of good faith and fair dealing and no claim of constructive fraud can lie based on the alleged conduct of defense counsel. The trial court sustained CSAA’s demurrer without leave to amend and entered judgment in favor of CSAA on September 30, 2008. This timely appeal followed.
III. Discussion
1. Standard of Review
On appeal from a judgment following an order sustaining a demurrer without leave to amend, we exercise our independent judgment about whether the complaint states a viable cause of action. “First, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. Next, we treat the demurrer as admitting all material facts properly pleaded. Then we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] We do not, however, assume the truth of contentions, deductions, or conclusions of law.” (Stearn v. County of San Bernardino (2009) 170 Cal.App.4th 434, 439-440.) “We also consider matters which may be judicially noticed. [Citation.]... ‘ “[A] complaint otherwise good on its face is subject to demurrer when facts judicially noticed render it defective.” [Citation.]’ [Citations.]” (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 6.)
2. Alleged Breach of Duty of Good Faith and Fair Dealing
Kauffman claims CSAA breached its duty of “good faith” to Anson and the Tsais in three ways: by failing to retain separate counsel for Anson as soon as Kauffman made the policy limits section 998 offer; by “direct[ing] the counsel retained to represent the Tsais to reject the [section] 998 offer which was then rejected by said counsel”; and by failing to fully advise Anson and the Tsais, or misrepresenting the consequences, of the section 998 offer to Anson.
Kauffman argues that as soon as he made the policy limits section 998 offer to Anson alone, an immediate conflict arose necessitating the retention of separate Cumis counsel for Anson. Kauffman acknowledges a conflict of interest as between Anson and the Tsais was only “apparent,” but claims the conflict between “CSAA on one side and the Tsais on the other” was “real.” He further contends CSAA’s interest in a policy limits settlement as to all three insureds was motivated by a desire to avoid paying continuing defense costs for the Tsais.
The “eponym ‘Cumis counsel,’ is based on San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358.... [Civil Code s]ection 2860 partially changed the Cumis rule.” (Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1001.)
We note this assertion is seemingly at odds with Kauffman’s argument, discussed infra, that because the negligent entrustment claim against the Tsais’ was “extremely weak,” CSAA should have had no reservations about embracing the policy limits section 998 demand directed only to Anson.
When an insurance policy imposes a duty to defend on the insurer, certain conflicts of interest impose a duty on the insurer to provide independent counsel to the insured. (Civ. Code, § 2860, subd. (a).) “A mere possibility of a specified conflict does not require independent counsel. The conflict must be significant, not merely theoretical, actual, not merely potential.” (Dynamic Concepts, Inc. v. Truck Ins. Exchange, supra, 61 Cal.App.4th at p. 1007.) “No conflict of interest shall be deemed to exist... solely because an insured is sued for an amount in excess of the insurance policy limits.” (Civ. Code, § 2860, subd. (b).)
Lehto v. Allstate Insurance Company (1994) 31 Cal.App.4th 60 (Lehto) addressed a claimed conflict of interest and the issue of separate counsel in virtually the same circumstances presented here. Like the instant case, Lehto involved an automobile accident in which a son was driving a vehicle owned by his father and both were insured under the same policy. The plaintiff offered to settle with the father alone in exchange for the policy limits and maintained that “at that point in time, Allstate was duty bound to appoint separate counsel” because the settlement offer created an inherent conflict of interest between father and son. (Id. at p. 72.) The Lehto court held that while “plaintiff frames the issue in terms of a purported conflict of interest between the two insureds, we believe the real question before us is whether Allstate’s insistence on a release of both of its insureds constituted bad faith. We conclude that, in this case, it did not.” (Ibid.)
Accordingly, the Lehto court explained that it did “not address the issue of whether Allstate was required to appoint separate counsel for [father and son] in this case, since even had it done so, Allstate’s conundrum would not have been resolved. For even had [father] received the advice of counsel loyal to him alone and demanded that Allstate accept the ‘[father] only’ offer in return for his dismissal from the case, Allstate could not have accepted that offer without prejudicing [son].” (Lehto, supra, 31 Cal.App.4th at p. 72, fn. 9.)
We likewise conclude that whether the appointment of separate counsel was required is not the salient issue. The issue on the facts alleged here is whether CSAA had a “good faith” duty to agree to, or advise acceptance of, the policy limits section 998 offer made to Anson alone. Both Lehto and Strauss v. Farmers Insurance Exchange (1994) 26 Cal.App.4th 1017 (Strauss), on which Lehto relied, make clear CSAA had no such duty. On the contrary, as these cases explain, an insurer’s acceptance of such a policy limits offer directed to only one insured would constitute bad faith as to the remaining insured.
In Strauss, the court emphasized that an insurer has a good faith duty to all of its insureds under a policy. In that case, the plaintiff made a policy limits settlement offer to the driver only. (Strauss, supra, 26 Cal.App.4th at pp. 1019-1020.) The insurer rejected the offer because it did not release the other two insureds and counteroffered “to settle for the policy proceeds in exchange for a release of all three insureds.” (Id. at p. 1020.) After settling with the insureds and receiving an assignment of any claims against Farmers, the plaintiff sued the insurer, alleging it had acted in bad faith in rejecting the driver-only settlement offer. (Ibid.) The Strauss court explained the covenant of good faith and fair dealing requires “an insurer to make a reasonable effort to settle a claim against its insured within policy limits whenever there is a substantial likelihood of a recovery in excess of those limits.... An insurer who breaches this duty acts in bad faith and may be held liable for the entire amount of the judgment recovered against its insured, including any portion in excess of the policy limits.” (Id. at p. 1021.) An insurer’s duty, however, extends to all of its insureds. Accordingly, “an insurer may, within the boundaries of good faith, reject a settlement offer that does not include a complete release of all of its insureds.” (Ibid.) The Strauss court thus rejected the bad faith claim, noting the insurer “would have acted in bad faith by accepting the offer, [therefore] it could not be held in bad faith for refusing it.” (Id. at p. 1022.)
Kauffman argues a section 998 offer to compromise made to a defendant is different from a settlement offer made directly to an insurer and therefore Lehto and Strauss are inapposite. Accordingly, while he does not dispute that an insurer has a duty to refuse a policy limits settlement offer extended to only one of several insureds, he contends an insurer has a duty to advise acceptance of a policy limits section 998 offer made to only one insured.
A policy limits section 998 offer, unlike a policy limits settlement offer, is (a) made directly to a party rather than the insurance company and (b) a request to take judgment against the insured, rather than to accept immediate payment in exchange for a dismissal. (See § 998, subd. (b); Moffett v. Barclay (1995) 32 Cal.App.4th 980, 984.) Neither of these distinctions between a policy limits settlement offer and a policy limits section 998 offer, however, support the difference in outcomes urged by Kauffman. In fact, there is some indication the settlement offer in Strauss was made under section 998. (Strauss, supra, 26 Cal.App.4th at p. 1020.)
Kauffman argues “the terms of the section 998 offer did not require payment of the claim; [but] only required that Anson consent to the judgment,” and therefore CSAA could have advised acceptance of the offer without “adversely affect[ing] his parents’ rights under the insurance policy.” We disagree. “The insurer’s duty not to favor the interests of one insured over the other... [applies] whether or not that interest has matured to the point of requiring payment. To conclude otherwise would require insureds to engage in a race to exhaust the available primary insurance....” (Schwartz v. State Farm Fire & Casualty Co. (2001) 88 Cal.App.4th 1329, 1338.) As the court in Schwartz concluded, “We reject the notion that, simply because a condition precedent to a particular obligation—the obligation to pay—has not yet occurred, the insurer is relieved from the implied covenants that inhere in every contract.... [The insurer] necessarily had contractual obligations to them, albeit contingent on future events, from the moment the parties entered into the contract.” (Id. at pp. 1336-1337.)
Moreover, it is a fiction to suggest the section 998 offer sought only “Anson’s consent to the judgment” rather than any payment by CSAA. CSAA would have had an obligation to pay a judgment against Anson, whether or not Kauffman sought to immediately enforce it. The “ ‘judgment creditor is a third party beneficiary of the policy.... Thus, the insurer owes a duty to exercise good faith in not withholding adjudicated damages owing to the judgment creditor.’ ” (San Diego Housing Com. v. Industrial Indemnity Co. (2002) 95 Cal.App.4th 669, 687.) Indeed, if CSAA had not duly paid such a judgment, Kauffman could have proceeded directly against it and “ ‘obtain[ed] satisfaction of the judgment up to the amount of the policy limits.’ ” (Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 68 (Shafer), quoting Reliance Ins. Co. v. Superior Court (2000) 84 Cal.App.4th 383, 386.) “Upon obtaining a judgment against the insured, the judgment creditor has an independent cause of action against the insurer to enforce the insurer’s obligation to indemnify the insured..., [that] ‘is not derivative or dependent upon any assignment from the insured.’ ” (Shafer, at p. 68, quoting Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2002) ¶ 15:1039, p. 15-187; see Ins. Code, § 11580, subd. (b)(2).) Accordingly, acceptance of the policy limits section 998 offer would have created a payment obligation on the part of CSAA which would have, in turn, adversely affected the Tsais’ rights under the policy.
Kauffman nevertheless argues CSAA should have advised acceptance of the policy limits section 998 offer to Anson because it knew Kauffman’s negligent entrustment claim against the Tsais was “weak” and therefore acceptance of the Anson-only offer would not have exposed the Tsais to much risk. Kauffman cites no authority suggesting an insurer may, in good faith, gamble with its insureds’ interests in this way. “ ‘It is absolutely no answer for the company to say that it paid the full amount of its policy if in so doing it fully protected one of its insureds and left the other completely exposed.’ ” (Shell Oil Company v. National Union Fire Ins. Co. (1996) 44 Cal.App.4th 1633, 1647, quoting Smoral v. Hanover Ins. Co. (1971) 37 A.D.2d 23, 25.) As long as Kauffman’s claims against the Tsais were extant, CSAA could not in good faith agree to a policy limits settlement offer or a policy limits section 998 offer only as to Anson. Furthermore, it certainly was not Kauffman’s position in his opposition to the Tsais’ motion for summary adjudication that his negligent entrustment claim was weak.
Kauffman also argues CSAA should have considered “alternatives” to rejecting the Anson-only offer. Kauffman claims “nothing would have prevented [CSAA] from seeking a stay of the action on the policy pending the outcome of the litigation against the parents,” or interpleading the policy proceeds. Again, Kauffman cites no authority suggesting CSAA acted in “bad faith” by failing to seek creative ways to avoid the legal obligation it would have had to pay the policy limits to Kauffman, had a policy limits judgment been entered against Anson pursuant to Kauffman’s section 998 offer.
C. Alleged Constructive Fraud
Kauffman alleged CSAA committed constructive fraud through alleged misrepresentations by it or its “agents” about the policy limits section 998 offer or by failing to advise Anson and the Tsais of the consequences of the policy limits section 998 offer. Kauffman admitted CSAA promptly retained defense counsel upon the insureds’ tender of the defense of his action. An insurance company that retains counsel for its insured must “rely on independent counsel for the conduct of the litigation.... [T]he carrier [does not assume] by contract a nondelegable duty to present an adequate defense.” (Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 880-881.) While the insurance company has a duty to defend its insureds, that duty is delegable as a matter of law because an insurer is not legally authorized to practice law. (Id. pp. at 881-882; Foster v. County of San Luis Obispo (1993) 14 Cal.App.4th 668, 672.) “Having chosen competent independent counsel to represent the insured in litigation, the carrier may rely upon trial counsel to conduct the litigation, and the carrier does not become liable for trial counsel’s legal malpractice. If trial counsel negligently conducts the litigation, the remedy for this negligence is found in an action against counsel for malpractice and not in a suit against counsel’s employer to impose vicarious liability.” (Merritt v. Reserve Ins. Co, supra, at pp. 881-882.) Accordingly, CSAA was entitled to rely on retained defense counsel to conduct the litigation. No constructive fraud claim will lie against CSAA for the alleged failure of defense counsel to fully advise the insureds. (Ibid.)
IV. Conclusion
It is apparent from the record and arguments in this case that counsel struck on the idea that a policy limits section 998 offer made to only one of several insureds, rather than a policy limits settlement offer made directly to the insurer, would fly under the holdings of Lehto and Strauss. In our view, however, this strategy flies in the face of Lehto and Strauss. While counsel’s efforts to obtain recompense for a severely injured client are understandable, there is no “bad faith” claim on the facts alleged here. The judgment is affirmed.
We concur: Marchiano, P. J. Dondero, J.