Rankin v. Curtis

183 Cal. App. 3d 939, 228 Cal. Rptr. 753, 1986 Cal. App. LEXIS 1852

• Court: California Court of Appeal
• Decided: July 25, 1986
• Docket: D001838
• Status: Published

Opinions

Opinion

WIENER, J.

Communication among lawyers is frequently expedited by the use of a few legal “buzz words” which attempt to describe a complex concept in an abbreviated fashion. Unfortunately, brevity sometimes results in a loss of clarity as to what is meant by the commonly used term. We have that problem here where we deal with the notion of “good faith” in the context of multiparty tort litigation. In this writ proceeding¹ we consider the relationship between a “good faith” settlement under Code of Civil Procedure section 877.6² (see generally Tech-Bilt, Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488 [213 Cal.Rptr. 256, 698 P.2d 159]) and the insurer’s obligation to act in “good faith” toward its insured established in cases such as Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 [328 P.2d 198, 68 A.L.R.2d 883] and Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425 [58 Cal.Rptr. 13, 426 P.2d 173], More particularly, we must decide whether a settlement is in “good faith” even though the insurer for one of the settling defendants arguably breached its “good faith” obligations by denying coverage and refusing to negotiate on behalf of one of the nonsettling defendants. Although these two “good faith” concepts bear similar labels and arguably encompass analogous principles, they are in reality separate and distinct legal ideas. We conclude that an insurer’s bad faith toward one of its insureds does not automatically or necessarily establish that the settlement on behalf of other insureds was not in good faith. The settlement in this case, however, preceded the Supreme Court’s Tech-Bilt decision. Joni Curtis, the nonsettling defendant here, should have the opportunity to present evidence consistent with Tech-Bilt’s analysis aimed at demonstrating that the proposed settlement with the plaintiff, as opposed to the insurer’s conduct toward her, was in bad faith. Accordingly, we issue a writ directing the superior court to allow further discovery and conduct a Tech-Bilt hearing.

Factual and Procedural Background

In August 1980, 15-year-old Wendy Rankin (Wendy) sustained serious physical injuries while running an obstacle course at a church camp. She was rendered a quadriplegic as a result of the accident.

Wendy filed a personal injury complaint against a host of defendants including the First Baptist Church of Del Cerro, which was insured by Preferred Risk Mutual Insurance Companies.³ Also included as a defendant was Joni Curtis, a Baptist church member and camp counselor who allegedly administered first aid to Wendy immediately after the accident. The complaint alleges she was an “agent and employee” of the First Baptist Church at the camp. Notwithstanding this allegation, Preferred Risk took the position that Curtis was not an employee of the Church and therefore did not qualify as an “additional insured” under a provision in the Church’s liability policy including for coverage purposes “employees.” As a result, Preferred Risk made no attempt to represent Curtis’s interests in the settlement negotiations.

After extensive negotiations between most of the defendants, their insurers and Wendy, assisted by retired Superior Court Judge William Yale, a settlement agreement was reached in February 1984. Curtis had not been served with the complaint, was not notified and did not participate personally or through a representative in these negotiations.⁴ The settlement agreement provided for a settlement package of $1.45 million. The Preferred Risk defendants contributed $500,000, the policy limits on the applicable Preferred Risk policy. The additional participating defendants also made policy limit contributions. Pursuant to the agreement an annuity providing Wendy with monthly payments of $6,368 per month for life was to be purchased.

A provision in the settlement agreement indicates that the parties recognized the potential that Curtis might be deemed an “employee” of the church and therefore covered as an “additional insured” under the Preferred Risk policy. That provision requires Wendy to indemnify Preferred Risk for any amounts recovered by other persons against Preferred Risk to the extent Wendy recovered any amounts from persons other than the parties to the settlement.⁵ Thus, if Wendy obtains a judgment against Curtis and Curtis in turn recovers the amount of that judgment from Preferred Risk as part of her damages in a bad faith action against it, the settlement agreement requires Wendy to transfer to Preferred Risk any amount paid to her by Curtis. While the language of the provision is complex and the number of factual and legal scenarios numerous, the provision appears to complete a circular transaction in which sums of money may change hands but the net effect is a wash. Its inclusion in the settlement agreement thus removes any incentive for Wendy to pursue her action against Curtis if it is determined in a separate declaratory relief action that Curtis qualifies as an “additional insured” under the Preferred Risk policy.⁶

On March 9, 1984, the settling defendants filed a motion to confirm that the settlement agreement was in good faith. Curtis was served with notice of the motion to confirm sometime before March 13 but the record is unclear as to the precise date. It is clear, however, that Curtis’s insurer on a homeowners policy—United Pacific Reliance Insurance—was served with notice on March 9. United Pacific was first contacted about the claims against Curtis on February 8, 1984, by Wendy’s attorney, at which time a very general discussion was held but no demands were made. On March 14, 1984, Wendy’s attorney made a demand to United Pacific for the policy limits of the homeowners policy issued to Curtis.

United Pacific then retained Attorney Robert Gallagher to represent Curtis’s interest in the settlement agreement. Gallagher first received the file in the matter on March 26, 1984—three days before the scheduled hearing. On March 29, 1984, United Pacific recognized the possibility of potential conflict in having its attorney, Gallagher, represent Curtis, so independent counsel, David Stumbos, was retained for Curtis two hours before the hearing.

Attorneys Daniel Shinoff (from Gallagher’s law office) and Stumbos were present at the hearing and each informed the court he was making a special appearance for Curtis. Gallagher’s declaration, filed on the date of the hearing, stated his lack of knowledge of or preparation for the settlement “good faith” hearing and requested either a denial of the motion or that the court “defer the resolution in this matter for at least 90 days in order to afford my client the opportunity to make a demand upon other insurance carriers in this matter for defense and indemnification and to provide an adequate opportunity to review the facts . . . and meaningfully participate in the resolution of this case.”

Because of the proposed settlement’s potential effect on Curtis’s indemnity rights against the settling defendants, the trial court allowed Shinoff and Stumbos to argue.⁷ It proceeded to find that service of the motion papers on Curtis had been timely and denied Curtis’s request for a continuance. It then stated it could not find the settlement had been made in bad faith⁸ and granted the motion.

Discussion

Curtis’s primary contention is that the trial court erred in finding the settlement was made in good faith.⁹ She argues that Preferred Risk’s alleged bad faith in failing to protect her interests during settlement negotiations renders the entire settlement “in bad faith” for the purposes of section 877.6.

We have previously recognized that the goals of multiparty tort litigation include maximization of recovery to the injured party, settlement of the injured party’s claim and equitable apportionment of liability among concurrent tortfeasors. (American Bankers Ins. Co. v. Avco-Lycoming Division (1979) 97 Cal.App.3d 732, 736 [159 Cal.Rptr. 70].) Consistent with these goals, we accept as a general proposition that the Legislature intended the “good faith” concept in section 877.6 to be a flexible principle imposing on reviewing courts the obligation to guard against the numerous ways in which the interests of nonsettling defendants may be unfairly prejudiced. (River Garden Farms, Inc. v. Superior Court (1972) 26 Cal.App.3d 986, 997 [103 Cal.Rptr. 498), quoted with approval in Tech-Bilt, supra, 38 Cal.3d at pp. 494-495; see also id., at p. 494, fn. 4.) In applying the concept to any particular claim of unfairness, however, we must keep in mind the singular function of the good faith determination under subdivision (c) of section 877.6. “A determination by the court that the settlement was made in good faith shall bar any other joint tortfeasor from any further claims against the settling tortfeasor for equitable comparative contribution, or partial or comparative indemnity, based on comparative negligence or comparative fault. ” (Italics added.) Thus, a finding of good faith pursuant to section 877.6 in no way affects Curtis’s rights as against anyone other than the settling tortfeasors. Specifically, Curtis maintains all her rights as against Preferred Risk which she asserts has breached its duty to deal with her in good faith.

The lack of legal relevance which the insurance coverage issue bears to the good faith settlement issue before us should not mask the factual concern we have with the manner in which Curtis has been treated by Preferred Risk.¹⁰ Putting aside issues of coverage, it is troubling to think that having at least recognized a potential coverage issue existed (see ante, p. 943), Preferred Risk would not have protected Curtis’s interests by at a minimum informing her of the lawsuit and providing independent counsel before the settlement negotiations began.¹¹ And to the extent Curtis was deliberately excluded from the settlement discussions, suspicions naturally arise that some party to the settlement may have sought to take advantage of her absence. (Compare Smith v. Mulvaney (S.D.Cal. 1985) [1984-1985 Transfer Binder] Fed.Sec.L.Rep. (CCH) f 92,084, considering the fact that settlement negotiations were open to all defendants in finding a settlement to be in good faith under California law.)

Nonetheless, Preferred Risk’s possible bad faith in evaluating a coverage issue is irrelevant to the issue of whether the settling tortfeasors acted in good faith consistent with Tech-Bilt, Inc. v. Woodward-Clyde & Associates, supra, 38 Cal.3d 488. Insofar as Preferred Risk is concerned, Curtis’ rights are unaffected by the good faith determination, which only forecloses her rights of indemnity against the settling defendants. If she prevails in the declaratory relief action on the coverage issue, she is entitled to recover in a later bad faith action all damages caused by Preferred Risk’s breach of the implied covenant. (See Brandt v. Superior Court (1985) 37 Cal.3d 813, 817 [210 Cal.Rptr. 211, 693 P.2d 796]; Neal v. Farmers Ins. Exchange (1978)21 Cal.3d 910, 925 [148 Cal.Rptr. 389, 582 P.2d 980].) The principal element in such damages will be measured by the amount of any judgment Wendy recovers against Curtis less any amounts Curtis would have had to pay had Preferred Risk initially admitted coverage. If Curtis can establish that Wendy would have agreed to release Curtis in exchange for payment of the policy limits, Curtis would be entitled to be indemnified for all sums reasonably paid to Wendy. These sums would presumably include either payments made pursuant to a judgment obtained by Wendy or a reasonable settlement negotiated by Curtis. In addition, Curtis would be entitled to attorneys’ fees (see Lareau v. Southern Pac. Transportation Co. (1975) 44 Cal.App.3d 783, 798, fn. 15 [118 Cal.Rptr. 837]) and perhaps emotional distress damages (see Crisci v. Security Ins. Co., supra, 66 Cal.2d at pp. 433-434).¹²

We also observe that Curtis’s argument assumes Preferred Risk violated the good faith covenant in denying coverage to her as an employee of the First Baptist Church. Obviously Curtis must prove that assertion at some point in time. Acceptance of her argument would require that the issue of the insurer’s good faith be litigated as part and parcel of the good faith settlement hearing. The impracticality of such a procedure further supports our conclusion that the insurer’s good faith is not at issue in that hearing.

If the only claim Curtis could make related to Preferred Risk’s bad faith resolution of an insurance coverage issue, we would be inclined to let the trial court’s determination of good faith as to the settling defendants stand. Here, however, it is impossible for us to determine whether Curtis’s emphasis on Preferred Risk’s conduct indicates that the settlement is otherwise unobjectionable or rather is a function of the fact that Curtis had no meaningful opportunity to develop evidence which would demonstrate that the settlement was “so poorly related to the value of the case as to impose a potentially disproportionate cost on the defendant ultimately selected for suit.’’ (River Garden Farms, supra, 26 Cal.App.3d at p. 997, quoted in Tech-Bilt, supra, 38 Cal.3d at p. 495.) As noted earlier this good faith hearing occurred before the Supreme Court filed its Tech-Bilt decision and thus the parties may not have been aware of the precise issues on which to focus. Moreover, the timing of the notice (ante, fn. 9) and Curtis’s lack of knowledge of and participation in the litigation up to the point of the hearing (ante, p. 944) made it impossible for her to make a thoughtful and comprehensive presentation of her reasons for opposing the settlement. The attorney for her homeowners insurance carrier received notice of the case only three days before the good faith hearing. When a potential conflict was recognized, another attorney was retained to represent Curtis but he was contacted a mere two hours before the hearing. Not surprisingly in view of the timing, the attorneys representing Curtis and her insurer conducted no discovery in preparation for the hearing. Despite these numerous factors suggesting that Curtis’s participation in the hearing would be pro forma at best, the trial court denied her request for a continuance.

We recognize that trial courts must be accorded considerable discretion in ruling on motions for a continuance. (See, e.g In re Marriage of Johnson (1982) 134 Cal.App.3d 148, 154 [184 Cal.Rptr. 444].) Such discretion is abused, however, where the lack of a continuance results in the denial of a fair hearing. (See Cohen v. Herbert (1960) 186 Cal.App.2d 488, 494 [8 Cal.Rptr. 922].) We sympathize with the trial judge who was concerned that delaying the hearing might reduce the amount of the annuity which could be purchased for the plaintiff with the settlement proceeds. Such concerns, however, cannot be inflated to the point they emasculate the entire purpose of the good faith hearing.

In considering an analogous situation, one Court of Appeal recently concluded that to the extent a nonsettling defendant has a right to participate in a good faith hearing, “it requires little discussion to find a concurrent right ... to engage in discovery against the settling defendant to elicit evidence relevant to the Tech-Bilt factors.” (Singer Co. v. Superior Court (1986) 179 Cal.App.3d 875, 895 [225 Cal.Rptr. 159].) In Singer, the trial court denied a nonsettling defendant’s request for a continuance of a good faith hearing until such time as the settling defendant responded to discovery relevant to the proportionality of the proposed settlement. (Id. at p. 883.) The Court of Appeal concluded that “the abuse of discretion here involved was not respondent court’s finding of good faith based on the evidence before it, but rather its refusal to postpone the hearing on the good faith of [the] settlement with plaintiffs until such time as [the nonsettling defendant] could complete pertinent discovery directed to those factors enumerated in Tech-Bilt, Inc., supra, 38 Cal.3d 488.” (Id. at p. 897.)

We likewise believe Curtis must be afforded a reasonable opportunity to challenge the proportionality of the settlement consistent with the Supreme Court’s Tech-Bilt analysis. As we have explained, however, Preferred Risk’s denial of coverage is not the focus of that inquiry. Rather, the ultimate issue to be decided is whether the settlement figure is “grossly disproportionate to what a reasonable person, at the time of the settlement, would estimate the settling defendant’s liability to be.” (Torres v. Union Pacific R.R. Co. (1984) 157 Cal.App.3d 499, 509 [203 Cal.Rptr. 825], quoted in Tech-Bilt, supra, 38 Cal.3d at p. 499.)

Accordingly, a writ will issue directing the superior court to vacate its order finding the settlement in good faith and to allow Curtis reasonable discovery before recalendaring the good faith hearing.¹³ The parties shall bear their respective costs in this proceeding.

Work, J., concurred.

1 In the interests of fairness and future consistency, we have elected to treat Curtis’s purported appeal as a petition for writ of mandate. (See Code Civ. Proc., § 877.6, subd. (e), effective Jan. 1, 1985; Barth-Wittmore Insurance v. H. R. Murphy Enterprises, Inc. (1985) 169 Cal.App.3d 124, 130-131 [214 Cal.Rptr. 894].) In doing so we do not necessarily reject Curtis’s contention that our earlier denial of defendants’ motion to dismiss her appeal is law of the case on the question of the appealability of the confirmation order. (See Pigeon Point Ranch, Inc. v. Perot (1963) 59 Cal.2d 227, 230-231 [28 Cal.Rptr. 865, 379 P.2d 321].) But even if that doctrine were inapplicable given the qualified nature of our denial order (see id. at pp. 231-232), the question here is not our jurisdiction to consider the issues presented by the case but instead merely the label under which they will be considered.

2 A11 statutory references are to the Code of Civil Procedure.

3 Preferred Risk also assumed the defense of several other defendants in the lawsuit including the San Diego Southern Baptist Association, The Southern Baptist General Convention of California, and church pastors Phil Nall and Sam Williams. For sake of convenience we refer to all defendants whose defense Preferred Risk assumed as the “Preferred Risk defendants.” The Preferred Risk defendants are the only parties responding to Curtis’s appeal/ writ petition.

4 Also not participating in the settlement were defendants John Lopresti and Gay Nall. The record reflects that representatives of these defendants were served with the motion papers but they made no appearance at the confirmation hearing to contest the good faith of the settlement.

5 The provision, signed by Wendy, reads as follows: “For and in Further Consideration of the Payments Called for Herein, specifically the payment by ‘Preferred Risk’ of policy limits on behalf of their insureds. . . 1 do . . . agree to fully indemnify ‘Preferred Risk’ and to hold any monies recovered from other persons, organizations, associations or corporations and their respective insurance carriers not parties to this settlement agreement, as a result of judgment or settlement, with or without further litigation, in trust for ‘Preferred Risk’ to be paid to ‘Preferred Risk’ in the event of recovery in a subsequent action or actions by other persons, organizations, associations or corporations and their respective insurance carriers, against ‘Preferred Risk.’ This special indemnification and trust agreement is made and based on Preferred Risk’s commitment to actively and vigorously defend such subsequent action or actions.”

6 Following the approval of the settlement, Preferred Risk filed such a declaratory relief action against Curtis seeking a judicial determination of the coverage issue. (See San Diego Super. Ct. case No. 528745, filed Oct. 3, 1984.) Apparently the case has not progressed beyond the filing of a first amended complaint.

7 We are unaware of the substance of the argument, however, because it was unreported.

8 The terminology used by the trial court is not surprising since subdivision (d) of section 877.6 imposes the burden of proof on the party “asserting the lack of good faith.”

9 Curtis also asserts that she failed to receive adequate (20-day) notice of the confirmation hearing as required by section 877.6, subdivision (a). We are inclined to think Curtis waived any objection to the adequacy of the notice because of her counsel’s decision to appear at the confirmation hearing and argue the merits of the motion (see Lacey v. Bertone (1949) 33 Cal.2d 649, 651 [203 P.2d 755]; Alliance Bank v. Murray (1984) 161 Cal.App.3d 1, 7-8 [207 Cal.Rptr. 233]) but in any event, given our other conclusions, we find it unnecessary to resolve the issue.

10 Similarly, the record reveals no justification for plaintiff’s failure to serve Curtis with the complaint.

11 Preferred Risk’s declaratory relief action recites that it has now agreed to defend Curtis at Curtis’ request subject to a reservation of rights. We see no reason, however, why the insurer’s good faith duty does not extend to informing a potential insured of the existence of a lawsuit of which the insurer has knowledge.

12 Of these three elements of damage Curtis could hypothetically recover, we have already noted that the indemnity clause in the settlement agreement makes it highly unlikely Wendy will pursue her claim against Curtis if Curtis is found to be an additional insured under the Preferred Risk policy. (See ante, p. 944.) And since Preferred Risk has agreed to defend Curtis (ante, fn. 11), we assume her legal costs in both the declaratory relief action and Wendy’s continuing personal injury action are being covered. (See Brandt v. Superior Court, supra, 37 Cal.3d at p. 818.) This leaves, as the only probable element of recoverable damage, any provable emotional distress suffered as a result of being forced to continue defending the lawsuit.

13 We wish to stress that our decision should not be construed as expressing any opinion on the adequacy of the settlement. We have issued the writ solely because of the procedural concerns which we have expressed. After discovery and a new good faith hearing, the court, guided by the Tech-Bilt criteria, is not precluded from deciding that the settlement here is in good faith. Struggling through this case we too have pondered the question whether section 877.6, subdivision (c), as applied is constitutional as to persons who are not given the opportunity to appear and participate in the good faith hearing. (See Singer Co. v. Superior Court, supra, 179 Cal.App.3d 875.) That issue, however, was neither briefed nor argued. Moreover, in light of our result which is consistent with Singer there is no need to explore the constitutional ramifications of the statute’s application. Putting aside constitutional considerations, however, basic fairness requires that every defendant facing potential liability be allowed to participate in settlement negotiations and contest the alleged good faith of any settlement among other defendants.