Source: https://law.justia.com/cases/california/court-of-appeal/4th/59/6.html
Timestamp: 2019-04-22 08:32:58+00:00

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J.B. AGUERRE, INC., et al., Plaintiffs and Appellants, v. AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY et al., Defendants and Respondents.
Shernoff, Bidart & Darras, Shernoff, Bidart, Darras & Arkin, Michael J. Bidart and Sharon J. Arkin for Plaintiffs and Appellants.
A liability insurer was not in bad faith in funding a settlement with a contribution from its insured where the insured allegedly feared punitive damages, the insurer did not coerce the contribution, the contribution was modest and in reasonable proportion to punitive damage exposure, and where the contribution was the product of collusion between the insured and claimant. We affirm the trial court's judgment for the insurer following sustaining of a demurrer.
Plaintiffs and appellants J.B. Aguerre, Inc., Jean B. Aguerre, and Claudia Aguerre (collectively Aguerre) appeal from an order sustaining a demurrer to their first amended complaint for bad faith breach of an insurance policy, without leave to amend.
Aguerre operates a dairy business. Aguerre bought primary and excess auto liability policies from defendants and respondents American Guaranty and Liability Insurance Company and Zurich-American Insurance Company of Illinois (collectively Zurich). The primary policy had a limit of $1 million, the excess, $5 million.
The policies (attached with the first amended complaint) afforded coverage for "accidents."
"Cooperate with us in the investigation, settlement or defense of the claim or 'suit.' "
"Under Liability Coverage, we agree in writing that the 'insured' has an obligation to pay or until the amount of that obligation has finally been determined by judgment after trial."
Westenberg, Aguerre's employee, seriously injured Sandra, Jillian, and Kimberly Kersten (Kerstens) in an accident while driving Aguerre's truck insured under Zurich's policy. Westenberg was convicted of driving drunk at the time of the accident.
Kerstens sued Aguerre and Westenberg (Kersten action). Aguerre tendered defense of the Kersten action to Zurich, who agreed to defend.
The damages awarded to all four plaintiffs totaled $578,488.
The award further stated: "All Plaintiff's requests for punitive damages are denied."
Kerstens exercised their statutory right to a trial de novo (Code Civ. Proc., § 1141.20, subd. (b)) and rejected the arbitrator's award.
Several months after the arbitration Roger Stewart, personal counsel for Aguerre, wrote to Michael Bidart, who represents Aguerre in the present bad faith action. Stewart advised that Kerstens had, in the previous year, offered to settle the action for $1 million.
"As you know the plaintiff has reduced his demand from $4,000,000 down to $2,000,000. The co-defendant Westenberg has made some kind of a deal with the plaintiff and has now changed his story to very much implicate Mr. Aguerre personally in the events leading up to the accident.
The letter showed carbon copies to Mr. DeJesso of Zurich, "per request of Attorneys Bidart & Kemp," and to Michael Bidart.
Zurich declined to pay $2 million, but after negotiations offered to pay $1.6 million. The letter confirming this offer states that Zurich reserves its right to recover part or all of this sum from Aguerre, but will waive this right if Aguerre asserts no claims against Zurich.
Aguerre argues it agreed to this settlement under duress, because of fear that Kerstens might obtain a significant punitive damage recovery against Aguerre, not covered by insurance. Aguerre alleged that punitive damage exposure arose because Westenberg "made some kind of deal with [Kersten] and ... changed his story to very much implicate Mr. Aguerre personally in the events leading up to the accident." Aguerre, however, has not alleged the particulars of Westenberg's statement, nor explained how the statement increased Aguerre's punitive damage exposure. Aguerre alleges it was bad faith for Zurich to decline to pay $2 million to Kerstens because "the case had a value of $2 million."
The $25,000 minimum additional compensation which Aguerre allegedly agreed to pay Kerstens if the bad faith case were unsuccessful is 1.56 percent of the $1.6 million sum Zurich paid to Kerstens. Further, it appears that Aguerre would be entitled under the alleged agreement to keep any recovery from Zurich exceeding the $400,000 "first level of proceeds" payable to Kerstens. The damages Aguerre seeks in the present action include punitive as well as compensatory damages.
Zurich demurred to the first amended complaint on two grounds. First, it argued that case law precluded liability for bad faith refusal to settle where the insured had not been subjected to a judgment in excess of policy limits. Second, it urged that the complaint was barred by the "no action" clause of the policy.
The trial court sustained the demurrer, without leave to amend.
Croskey et al., California Practice Guide: Insurance Litigation (The Rutter Group 1997) ¶ 12:334 rev. #1, 1996, explains this requirement as follows: "The excess judgment is necessary to establish both the insured's liability to the injured party and the amount thereof for damages purposes in the subsequent 'bad faith' action against the insurer. After all, the insurer's refusal to settle may prove correct if a defense verdict is obtained or plaintiff's verdict comes in for less than policy limits."
Here, Aguerre also claims a harm different from that in the "excess judgment" cases. Aguerre does not complain of exposure to a compensatory damage judgment exceeding the policy's dollar limits. Rather, Aguerre contends Zurich used Aguerre's fear of punitive damages to unreasonably force Aguerre's contribution to a settlement.
California cases have not specifically addressed the requisites for a bad faith claim in this setting. However, general principles of insurance law, and several out-of-state decisions, point the way to the proper analysis.
Several out-of-state cases address the insurer's duty of good faith in the specific context where punitive damages are sought against the insured. (Magnum Foods, Inc. v. Continental Casualty Co. (10th Cir. 1994) 36 F.3d 1491, 1506 [duty of good faith does not include paying money to settle uninsurable punitive damage claim, but does include "working cooperatively with [the insured] throughout in both defending and attempting to settle the entire case, with fair consideration given to the [insured's] concerns because of its exposure to the uninsured punitive damage claim"]; Ging v. American Liberty Insurance Company (5th Cir. 1970) 423 F.2d 115, 120-121 [in defending case requesting punitive damages, duty of good faith requires insurer to advise insured of settlement opportunities, warn of uninsured claims, and negotiate for settlement in good faith when insured's interests diverge from insurers].) These cases are consistent with California's general [59 Cal. App. 4th 15] rules, and indicate that the insurer, though not liable to indemnify against punitive damages, must reasonably assist and cooperate with the insured in defending and settling punitive damage claims.
 We conclude that an insurer potentially can be liable for unreasonably coercing an insured to contribute to a settlement fund, even though (by definition) there is no "excess judgment" where a case is settled. Suppose, to frame an egregious hypothetical case, that an insurer advises its insured that the insured has very substantial punitive damage exposure; that punitive damages are not covered by the policy; and that, in order to settle, the insured must contribute the lion's share of a settlement. The insured follows the advice, and pays most of the settlement from its own pocket. In fact, the insurer's advice is intentionally false, and the insured had no serious punitive damage exposure. In this hypothetical, the insurer clearly was acting in bad faith. It failed to reasonably cooperate with the insured's defense against punitive damages, and instead, used the insured's concern about such damages to coerce the insured to pay most of the settlement, thus reducing the insurer's own outlay. We have no doubt that these hypothetical facts state a cause of action for bad faith, even though the insured did not suffer an excess judgment.
The theory advanced by Aguerre is similar to our hypothetical. Aguerre does not contend it was subjected to an excess judgment. Rather, Aguerre asserts a different theory of recovery: that fear of uninsured punitive damage exposure coerced Aguerre to contribute to a settlement. The trial court erred in sustaining the demurrer on the ground that Aguerre failed to allege a judgment in excess of policy limits, because Aguerre was proceeding on a different theory, requiring pleading and proof of different elements.
It also was error to conclude that the "no action" clause of the policy barred Aguerre's suit. We think Zurich's letter to Kerstens' counsel confirming that Zurich would pay $1.6 million is sufficient "agreement in writing that the 'insured' has an obligation to pay" to satisfy the "no action" clause, particularly given the terse and ambiguous nature of the clause, fn. 1 and the usual rule requiring construction of policy language against an insurer.
 We conclude the trial court's ruling was correct, because Aguerre failed to plead facts sufficient to show that Zurich acted unreasonably in defending Aguerre and settling the case.
Aguerre's first amended complaint alleges no facts to show that Zurich coerced or attempted to coerce Aguerre to contribute to the settlement, whether by raising the specter of uninsured punitive damages, or otherwise. Aguerre does not even allege that Zurich asked Aguerre to contribute to the settlement fund.
Aguerre alleges only that Zurich refused to meet Kerstens' $2 million demand. But no facts are alleged to show this was unreasonable. Zurich had $6 million in total coverage, so there was no evident need to pay $2 million to avoid exposing Aguerre to a compensatory judgment in excess of policy limits. A neutral arbitrator had valued Kerstens' claims at $578,000, total, and Kerstens had previously made a formal, Code of Civil Procedure section 998 demand to settle the case for $1 million. Also, Kerstens had recently reduced their demand drastically, from $4 million to $2 million, movement that Zurich could reasonably conclude intimated there might be further "softness" in Kerstens' demand.
Further, there was no substantial reason for Zurich to believe that Aguerre had significant punitive damage exposure. The neutral arbitrator had flatly denied the punitive damage claim. Stewart's letter to Zurich warned of excess general damages, but not punitive damages. There is no allegation that Kerstens were insisting that an increased settlement was required because they had strong punitive damage claims against Aguerre.
Of course, although Zurich was not obliged to pay compensation for punitive damages in a settlement, it was required, as part of its duty to defend, to accommodate and cooperate in any effort by Aguerre to buy peace from the punitive damage claims by contributing to the settlement. But there are no allegations here to show that Zurich in any way obstructed or refused to cooperate with Aguerre's negotiation of its contribution to the settlement.
Moreover, Aguerre's contribution of 20 percent of the total settlement, as alleged here ($400,000 contribution alleged by Aguerre, with $1.6 million contributed by Zurich), is to all appearances a reasonable contribution in a case where, in Aguerre's words, there is a "significant" punitive damage exposure. Indeed, punitive damage awards after trial frequently, if not typically, substantially exceed the concurrent compensatory award. The reason is easy to see: Punitive damages can be awarded only where there is "clear and convincing evidence" of "despicable conduct." (Civ. Code, § 3294.) The required strong evidence of bad conduct often prompts the jury to make a large punitive award. So, we see nothing unreasonable about an insurer participating in a settlement where the insured settles a "significant" punitive exposure by paying 20 percent of the settlement sum.
This conclusion becomes all the stronger when we look through the form of the alleged Aguerre-Kersten transaction to its economic substance. As Aguerre is honest enough to allege, it will only have to pay Kerstens $25,000 fn. 2 if the present bad faith action is unsuccessful. Aguerre only agreed to pay $400,000 to the extent that sum is recovered from Zurich. We assume the bad faith case is being handled on a contingent fee (there is no contrary allegation). The claimed $400,000 detriment to Aguerre is thus largely if not entirely a fiction. Aguerre's true exposure is on the order of $25,000, or 1.5 percent of the sum contributed by Zurich. If, as Aguerre asserts, there was "significant" punitive damage exposure, then Aguerre compromised it for a song. Aguerre obtained a bargain settlement.
In reality, there is every reason to conclude from Aguerre's pleading that there was no significant punitive damage exposure. The arbitrator flatly denied the punitive damage claim. Stewart's letter to Zurich urging settlement did not mention the words "punitive damages." Kersten's alleged agreement to accept minimum additional compensation of only $25,000 [59 Cal. App. 4th 18] strongly evidences that Kerstens and their counsel did not believe there was "significant" punitive damage potential as against Aguerre (on the other hand, there was no reason for Kerstens to turn Aguerre's offer down-Kerstens got a free ride, with a $400,000 upside potential).
In short, Aguerre's contention that there was "significant" punitive damage liability is belied by all the facts it pleads.
What we have here, at bottom, is an effort by Aguerre to concoct a bad faith claim out of whole cloth, or, in the words of Justice Klein in Doser v. Middlesex Mutual Ins. Co., supra, 101 Cal.App.3d pages 891-892, by collusion between the claimants and the insured, with the "ingenious assistance of counsel." In return for its alleged commitment to pay Kerstens $25,000, Aguerre has attempted to position itself to pursue a high stakes, bad faith case, seeking punitive damages, from which it hopes to emerge not only with the Kersten claim disposed of at no cost to Aguerre, but a profit as well in the form of damages recovered from Zurich.
Bad faith litigation is not a game, where insureds are free to manufacture claims for recovery. Every judgment against an insurer potentially increases the amounts that other citizens must pay for their insurance premiums.
We conclude the trial court's ruling sustaining the demurrer was correct.
The judgment of the trial court is affirmed. Zurich shall recover its costs on appeal.
Johnson, Acting P. J., and Woods, J., concurred.
A petition for a rehearing was denied December 9, 1997, and appellants' petition for review by the Supreme Court was denied February 25, 1998.
FN 1. The clause does not state who must agree with whom (insurer and insured? insurer and claimant?), nor what they must agree on (that the insured is obliged to pay some amount? the specific amount that the insured must pay?). Nor does it specify the required level of formality of the "agreement." Is a written affirmation by the insurer's representative sufficient? Must the insurer sign? The insured or claimant sign? Is board authority required? Etc.
FN 2. Although numerous documents are attached with the first amended complaint, Aguerre has not attached any agreement between Aguerre and Kerstens governing the prosecution of the bad faith case, or requiring Aguerre to pay Kerstens anything. Thus we cannot know whether some contingency might relieve Aguerre entirely of the obligation to pay the $25,000.

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 § 1141
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 § 3294
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