Failure to Defend Under Second Policy May Have Consequences
We report here on major developments in case law, but also on practical points – cautionary tales, reality checks, and reminders.
Last year, one such case involved the issue of whether an insurer had an obligation to search for policies issued to other parties in the lawsuit – in that situation, the insurer did have that obligation. Safeco Ins. Co v. Parks, 170 Cal.App.4th 992 (2009). Today’s case concerns an insurer’s duty to examine coverage under multiple policies issued to the same insured and the risk of denying coverage under one policy even though there is coverage (at least in part) and a full defense being provided by another policy issued by that insurer. Risely v. Interinsurance Exchg. Of the Auto. Club, 2010 Cal.App. Lexis 399 (2010). The situation presented also created an opportunity for the insured to enter into a stipulated judgment even while being defended by the insurer.
The Risely case arose out of a car accident. Risely was riding in a car driven by Turner (the insured) who was allegedly driving erratically. Risely tried to get Turner to take her home or drive better. Risely claims Turner kept her in the car against her will. An accident occurred. Risely claims to have been severely injured.
Risely sued Turner for negligence and false imprisonment, among other claims. Turner tendered to his insurer under two policies: homeowners (with a $300,000 limit) and auto (with a $50,000 limit). The insurer agreed to defend the entire claim under the auto policy but denied defense and indemnity under the homeowners policy. (There is no mention of any auto exclusion in the homeowners or provision that only one of the company’s policies would apply to a claim.)
A settlement demand was made for $300,000 (the limits of the homeowners’ policy). The insurer declined the settlement demand on the grounds that it was in excess of the auto policy limits and there was no other applicable coverage. Thereafter, Turner (even though defended) entered into a stipulated judgment with Risely for $434,000 on the false imprisonment claim, and assigned his rights to Risely. Risely alleged the insurer refused to pay the judgment. (The insurer did pay its auto limits to Risely and other victims of the car accident.) Risely sued the insurer as judgment creditor and assignee of Turner’s rights under the homeowner’s policy.
The trial court granted summary judgment in the insurer’s favor on the basis that there could not be any damage for refusal to settle because, under Hamilton v. Maryland Cas. Co., 27 Cal.4th 718 (2002), an insured cannot settle behind its insurer’s back when the insurer is providing a defense. The trial court found that because the insurer provided a full defense, the failure to defend under the homeowner’s policy “was of no consequence.”
The appellate court disagreed, focusing on whether a claim could be made by the insured (and in his shoes, Risely) that the insured had not been fully protected from the expense of the litigation (through the defense provided) and the liability
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exposure. (Potential liability exposure was also a factor that led the Safeco court last year to conclude there was an obligation in those circumstances to look for insurance for other parties.) At the crux of Risely’s claims, concluded the appellate court, were issues that had not been determined yet and which should be determined, i.e., whether there was coverage afforded by the homeowners policy, whether the insurer breached the contract by not agreeing to defend and indemnify under the homeowners policy, and consequently whether there was bad faith in not settling within those policy limits. Providing a full defense, according to the appellate court, did not mean the failure to provide coverage under the homeowners policy was of “no consequence” to the insured. The case was reversed and remanded.
