Valencia v. Allstate Indemnity Co.

Filed 5/20/08 Valencia v. Allstate Indemnity Co. CA2/4

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

APPEAL from a judgment of the Superior Court of Los Angeles County, Edward A. Ferns, Judge. Affirmed.

Taylor & Ring and John C. Taylor; Kussman & Whitehill, Steven B. Stevens, and Michael Whitehill for Plaintiffs and Appellants.

James E. Fitzgerald and Jason R. Bendel for Defendant and Respondent.

In January 2005, Gilda Valencia (Gilda)[1]was killed in an accident when her daughters car collided with a truck driven by Jesus Hernandez (Hernandez) and owned by his construction company, Jesmar Construction Company, Inc., a California corporation (Jesmar). Gildas estate, her daughter, and other survivors (collectively the Valencias[2]), together with Hernandez and Jesmar (all parties collectively plaintiffs), brought an action against Allstate Indemnity Company (Allstate) for breach of contract and breach of the covenant of good faith and fair dealing. Allstate moved for summary judgment and summary adjudication. The trial court granted summary judgment in favor of Allstate and plaintiffs appeal. We affirm the judgment (order granting summary judgment).

FACTUAL AND PROCEDURAL BACKGROUND

Hernandezs truck collided with two vehicles besides the one which carried Gilda: one driven by Dennis Biggins (Biggins), and one by Albert Ramirez (Ramirez). Biggins and Ramirez suffered soft tissue injuries and property damage to their vehicles. Gildas daughter, Marie, the driver, was seriously injured. Gilda was pronounced dead at the scene. The California Highway Patrol concluded that Hernandez caused the collision.

Hernandez and Jesmar were covered under a business automobile policy issued by Allstate with a combined single limit for third party liability of $1 million. Biggins, Ramirez, and the Valencias made claims against Hernandez, and he tendered the claims to Allstate. On February 10, 2005, Allstate assigned the claims to its adjuster Beverly Durham, and she wrote to the Hernandezes, informing them of her assignment.

In April 2005, the Valencias filed a lawsuit against Hernandez, Jesmar, and others for wrongful death and personal injuries, seeking punitive damages (L.A. Super. Court Case No. BC331693 (the underlying action)). The Valencias were represented by the law firm of Kussman and Whitehill (K&W). Allstate tendered the defense of Hernandez and Jesmar to the law firm of McClaugherty, Mulder & Keidel (MM&K).

On May 4, 2005, Allstate sent a letter to Jesmar stating that the amount the Valencias, Biggins, and Ramirez could recover in the underlying action could be in excess of the policy limits. It also gave the contact information for Durham and informed Jesmar that it could hire its own attorney if it wished. Leslie Ann Keidel, an attorney at MM&K, wrote Hernandez two letters on May 11, 2005, telling him that the potential claims from the accident would likely exceed policy limits and that due to the claim for punitive damages, he should consider protecting his assets and those of Jesmar. She also informed him of his right to employ separate counsel.

On August 5, 2005, K&W wrote to MM&K, offering to settle the Valencias claim for $950,000 (the August 5th offer). A number of events occurred following the receipt of this letter, which we shall discuss in detail later in this opinion. It will suffice to say at this point that Hernandez and Jesmar did not accept the August 5th offer.

Hernandez and his wife Martha (Martha) then hired private counsel, Carl Agren. The parties agreed to a mediation, after which Jesmar, the Hernandezes, and Allstate agreed to entry of a stipulated judgment in the amount of $2,950,000 in favor of the Valencias. As part of this judgment, Allstate agreed to pay $950,000 to the Valencias and a total of $50,000 to Biggins and Ramirez. The Valencias agreed not to seek reimbursement of the remainder of the judgment from Jesmar and the Hernandezes in exchange for an assignment of the legal rights of Jesmar and the Hernandezes against Allstate. The Hernandezes paid over $11,000 in legal fees to Agren in connection with reaching this settlement.

On May 5, 2006, plaintiffs filed the instant complaint for breach of contract and breach of the covenant of good faith and fair dealing against Allstate. The complaint also contained a cause of action for legal malpractice against MM&K.

On February 23, 2007, Allstate moved for summary judgment or, in the alternative, summary adjudication. Allstates motion for summary judgment was based on the following arguments: (1) Allstates conduct in response to the settlement offer was not a breach of contract, nor unreasonable as a matter of law, since Allstate was advised that Jesmar and Hernandez did not want to accept the settlement offer; (2) Jesmar and Hernandez had no liability resulting from the underlying action, and therefore suffered no damages due to Allstates refusal to settle; and (3) the claim for punitive damages was specious in the context of this case.

In opposition, plaintiffs argued that a triable issue of fact exists as to whether Allstate unreasonably refused the Valencias August 5th offer. Plaintiffs claimed Allstate failed to adequately investigate the claim, properly evaluate the offer, and consult with its insureds prior to deciding to reject the offer. As a result, plaintiffs contended that the Hernandezes suffered economic loss and emotional distress due to Allstates failure to accept the reasonable settlement demand, and that a jury should determine whether Hernandez and Jesmar can recover punitive damages against Allstate.

The summary judgment motion was heard on May 11, 2007, and the court took the matter under submission. The trial court granted Allstates summary judgment motion on May 15, 2007, stating in its minute order as follows: There is nothing in the circumstances surrounding the offer and its lapse that evidences any breach of a duty by Allstate. The Valencia Plaintiffs argue that Allstate should have undertaken additional analysis of the claims, should have provided additional input to the insureds, and/or should have permitted the claimants to the proceeds from the policy to determine how the money should be allocated. [] These purported failures occurred at the preliminary stages of the claims process, and would not have resolved this matter in any way less prejudicial to the insureds. Allstate was well aware of the possibility that the insureds could be held personally liable for any judgment exceeding the policy limits, and that the judgment could be in the millions. Allstate was also aware that Biggins and Ramirez had claims. However, as plaintiff admits [a]t the time of the Valencia settlement demand Allstate was in a position to evaluate all of the potential claims against its insureds with the exception of the Biggins personal injury claim. [Citation.] In other words, just as the [MM&K] Firm had represented to the insureds it was likely that the potential claims would exceed the limits of the policy[,] [a]t the time of the offer, the insureds were truthfully informed of the relevant circumstances, and the insureds, not the law firm or Allstate, made a reasoned decision based upon that information. [] The argument and evidence in support of the opposition simply do not lead to the conclusion that any breach of the insurance agreement occurred, however, the opposition may simply be intended to create an inference that plaintiffs were damaged because they were required to retain a new law firm to represent them because Allstate and the [MM&K] Firm could have undertaken more analysis [a]t the outset, and could have attempted to resolve the claims to the settlement proceeds in a more creative manner. This inference is not reasonable under the circumstances. The issue of the [MM&K] Firms competence is not now before the court, but even assuming that plaintiffs counsel contends that the firm somehow breached a duty to the insureds, there is absolutely no evidence that Allstate knew of any breach of any duty owed to the insured by the [MM&K] Firm. [] The evidence submitted, shows that the Valencia plaintiffs counsel, inserted himself into the action about a week after the August 9, 2005 [sic] offer expired. His letter accuses Allstate of bad faith but fails to articulate any actionable misconduct on behalf of Allstate. [] Two months after that letter was dispatched, the insureds retained new counsel. The $11,000 in attorney fees paid to new counsel is the sole damage the Valencia plaintiffs contend resulted. The insureds did not complain about the firm to Allstate and did not ask for new counsel. Allstate played no role in the outcome of this matter other than to pay full policy limits as required to do under the global Stipulation for Settlement. Allstate cannot be held liable for the insureds decision to change counsel, when Allstate was not informed of the need to do so.

Judgment was entered in favor of Allstate on June 20, 2007. This timely appeal followed.

DISCUSSION

I. Standard of Review

A motion for summary judgment shall be granted in favor of a defendant if the defendant demonstrates that the plaintiff cannot establish one or more elements of the causes of action alleged, or if there is a complete defense to the causes of action alleged. (Code Civ. Proc., 437c, subd.(c); Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 849.) On appeal of a grant of summary judgment, we review the matter de novo in order to determine if a triable issue of fact exists. (Wiener v. Southcoast Childcare Centers, Inc. (2004) 32 Cal.4th 1138, 1142; Colgan v. Leatherman Tool Group, Inc. (2006) 135 Cal.App.4th 663, 678.) We view the evidence and reasonable inferences which can be drawn from the evidence in the light most favorable to the opposing party. (Aguilar, supra,25 Cal.4th at p. 843; Syngenta Crop Protection Inc. v. Helliker (2006) 138 Cal.App.4th 1135, 1155.) There is a triable issue of material fact if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof. (Aguilar, supra, at p. 850, fn. omitted.)

II. The Evidence

Most of the disputed facts relate to a September 6, 2005 meeting between the Hernandezes and MM&Ks attorneys. We examine their respective versions of the events of that date. We also focus on the communications between MM&K and Allstate that led Allstate to reject the August 5th offer. It is important to note that there is no dispute regarding the information MM&Ks attorneys gave to Allstate.

A. The Hernandezes Version

Hernandez and Martha testified in their depositions that they had limited contact with Allstate prior to the expiration of the August 5th offer. They did not meet Durham until the court-ordered mediation, and had one telephone conversation with her immediately following the accident. No one from Allstate attended the September 6 meeting. Allstate does not dispute these facts. Although the Hernandezes did not specifically remember seeing the initial coverage letters sent to them by Allstate and MM&K, Martha stated that she must have reviewed them because she took care of Jesmars insurance matters.

The Hernandezes claimed that they did not find out about the August 5th offer until the Labor Day weekend in September, when they received a message and a letter from Keidel. They made arrangements to meet with Keidel and Jay McClaugherty, another MM&K attorney, on September 6, 2005.

The Hernandezes testified they were not advised at the meeting that they should accept the $950,000 settlement offer. They were not asked for their input. Instead, they were told that they should refuse the offer because MM&Ks attorneys believed that the claim could be settled for less. They were never told whether Bigginss and Ramirezs claims had been evaluated. They denied being advised that the claim could potentially result in a $2 million to $3 million judgment that would put their personal assets at risk. They claimed that McClaugherty told them their potential liability was in the $3 million to $10 million range after they had hired Agren and the offer had expired.

The Hernandezes had a subsequent meeting on September 13, 2005, with MM&K and a financial advisor the firm had recommended, Richard Moneymaker. No one represented to them that Moneymaker was a bankruptcy lawyer; they were told that he was a financial planner. At the meeting, Keidel told them that if they declared bankruptcy, they could protect their personal assets. After this meeting, the Hernandezes decided to seek other counsel.

B. MM&Ks Version

Keidel testified that at her first meeting with Hernandez, they went over the allegations of the complaint in the underlying action. They discussed the fact that the value of the case was in excess of several million dollars and that the policy limit was only $1 million. She also told him that punitive damages would not be covered by insurance.

On August 10, 2005, Keidel wrote to Durham, informing her of the August 5th offer and the September 9th expiration date. That same day, Keidel wrote to K&W and requested a two-week extension to respond to the August 5th offer, explaining that [i]n order to make a settlement recommendation to my principal, it is imperative that at a minimum your clients be deposed, and that Mr. Biggins be deposed. On August 12, K&W responded by letter and refused to grant an extension.

On August 16, MM&K prepared a settlement recommendation letter in which it estimated the value of the underlying action to be about $3 million and the value of Maries personal injury claim to be $250,000 to $300,000 and recommended that the August 5th offer be accepted. However, neither the Hernandezes nor Allstate received this letter. On August 22, Keidel met with the Valencias and spoke to Durham but she could not remember whether she gave Durham her impression of the Valencias as potential witnesses.

On September 1, MM&K wrote to Hernandez, advising him of the August 5th offer and the upcoming September 9 expiration date. The letter informed him that Bigginss and Ramirezs property claims totaled $70,000. He was told that his policy would not cover all of the claims. The letter concluded, Should you wish to contribute your own funds to settle this case, or wish to instruct Allstate to settle with the plaintiffs for $950,000, please advise us immediately as plaintiffs will not extend their demand beyond September 9. We would like to discuss this with you, please contact us.

On September 6, Keidel and McClaugherty met with the Hernandezes to discuss the August 5th offer. McClaugherty testified he advised them that if they accepted the Valencias offer, they would be liable for a portion of the $70,000 in property damage claims that the attorneys were aware of, as well as potential unknown claims, due to the policy limits. Mc Claugherty said he told the Hernandezes that if the matter went to trial, the jury would not believe Hernandezs assertion that the accident was not his fault and that the Hernandezes faced a judgment in excess of $3 million, putting their personal assets at substantial risk. McClaugherty stated that if they wanted to proceed to trial, they should strongly consider seeing an asset protection lawyer. According to Keidel, McClaugherty told the Hernandezes that the claims had a value of between $2 million and $5 million. McClaugherty testified that he asked the Hernandezes what they wanted him to tell Allstate. They decided not to accept the settlement offer.

On September 7, MM&K wrote to K&W stating that We do not know about the potential personal injury claims of Mr. Biggins or Mr. Ramirez. . . . [] We are endeavoring to obtain enough information about the potential claims to be able to extend an offer to you, but simply cannot do it by the expiration of your demand on September 9.

On September 8, MM&K wrote to Durham, informing her that its attorneys had met with the Hernandezes and that the Hernandezes did not want to settle because the present claims exceed the policy limits [and] it is their desire at this time that $950,000 of the $1,000,000 limits not be exhausted and that [t]hey understand that . . . they remained exposed to punitive damages as well as a potential excess verdict.

C. Allstates Version

Durham testified that she received an initial opinion letter written by MM&K, wherein the firm stated that it anticipated the combined claims would exceed policy limits. She felt all along that this was a case where the insured was 100 percent at fault and that Allstate would be required to pay policy limits, leaving it to the claimants to divide the monies. On August 10, MM&K advised her by letter about the August 5th offer, and the firm stated that it would provide her with its analysis of the offer and a settlement recommendation.

On August 22, Durham told Keidel that she, Durham, did not have enough information to offer an opinion of the August 5th offer. She remembered asking Keidel to get an extension of the offers expiration date but she did not follow up to determine whether an extension had been granted. She did not ask Keidel for the analysis and settlement recommendation that Keidel had promised.

She did not investigate Bigginss claims beyond conducting a cursory review of his medical records. She did not determine whether MM&K had any additional information in this regard. Before the August 5th offer expired, she knew that Ramirezs medical bills were approximately $3,000, he had completed his treatment, and had suffered some temporary disability. She did not discuss the August 5th offer with the Hernandezes.

Durham received Keidels September 8 letter, informing her that the Hernandezes had rejected the August 5th offer. However, according to her logs, Durham did not read this letter until September 12, after the offer had expired.

III. Bad Faith

The implied covenant of good faith and fair dealing, inherent in all insurance contracts, obligates 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. [Citation.] 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. [Citations.] (Strauss v. Farmers Ins. Exchange (1994) 26 Cal.App.4th 1017, 1021.)

The California Supreme Court in Comunale v. Traders & Generals Ins. Co. [(1958)] 50 Cal.2d 654 addressed the nature and extent of duties imposed by this implied covenant in liability insurance policies. There the Supreme Court held an insurer in determining whether to settle a claim must give at least as much consideration to the welfare of the insured as it gives to its own interest. The governing standard is whether a prudent insurer would have accepted the settlement offer if it alone were to be liable for the entire judgment. (See Johansen v. California State Auto Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 16.) An insurer may be held liable for a judgment against the insured in excess of its policy limits where it has breached the implied covenant of good faith and fair dealing by unreasonably refusing to accept a settlement offer within the policy limits. (Commercial Union Assur. Cos. v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 916-917.) (Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 705-706.)

[T]he permissible considerations in evaluating the reasonableness of the settlement offer are whether in light of the victims injury and the probable liability of the insured the ultimate judgment is likely to exceed the amount of the settlement offer. Such factors as the limits imposed by the policy, a desire to reduce the amount of future settlements, or a belief that the policy does not provide coverage do not affect a decision as to whether the settlement offer in question is a reasonable one. (Betts v. Allstate Ins. Co., supra, 154 Cal.App.3d at pp. 706-707.)

An insurer cannot be liable for bad faith if its coverage decision was objectively reasonable. The objectively reasonable standard is based on an analysis of case law and is a legal question, not a factual one. (CalFarm Ins. Co. v. Krusiewicz (2005) 131 Cal.App.4th 273, 277.) [T]he reasonableness of the insurers decisions and actions must be evaluated as of the time that they were made; the evaluation cannot fairly be made in the light of subsequent events that may provide evidence of the insurers error. [Citation.] [] Thus, before an insurer can be found to have acted tortiously (i.e., in bad faith), for its delay or denial in the payment of policy benefits, it must be shown that the insurer acted unreasonably or without proper cause. . . . [Citations.] (Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co. [(2001)] 90 Cal.App.4th [335,] 346-347.) (CalFarm Ins. Co. v. Krusiewicz, supra, at p. 286.)

The insurer may turn to other parties in making its decision on settlement offers. It has the right to rely on qualified experts and legal counsel in making its decision. There is a clear implicit consensus in the cases on this subject that the duty to consider and weigh all the factors bearing upon the advisability of a settlement in the interests of the insured is upon the insurance carrier. Obviously this legal duty is exercised normally in conjunction with the judgment of counsel defending the cases against the insured. (Garner v. American Mut. Liability Ins. Co. (1973) 31 Cal.App.3d 843, 848, italics added; Davy v. Public National Ins. Co. (1960) 181 Cal App.2d 387, 395.)

The question of bad faith is ordinarily for the trier of fact to resolve, unless, from uncontroverted evidence, a reasonable man following the law can draw but one conclusion on the issue. [Citations.] (Davy v. Public National Ins. Co., supra, 181 Cal.App.2d at p. 400.)

Here there is no dispute that Allstate acknowledged coverage, agreed to pay policy limits, assigned counsel to the Hernandezes, and honored what it believed were the Hernandezes wishes when it rejected the August 5th offer.[3] In this case, the disputed facts relate to the communications between the Hernandezes and MM&K, not the Hernandezes and Allstate. The Hernandezes claim they were not asked for their input regarding the August 5th offer. Instead, MM&K informed them that the offer would be rejected. The Hernandezes denied that they decided to reject the offer. They claimed they merely assented to MM&Ks recommendation, which was based on an incomplete set of facts. However, this is squarely contradicted by the testimony of MM&Ks lawyers, who provided Allstate with its version of the meeting with the Hernandezes.

Assuming for purposes of this summary judgment motion, as we must, that the Hernandezes deposition testimony is credible, we are left with the conclusion that MM&K made the decision to reject the offer and then misrepresented to Allstate that the Hernandezes had done so after being fully informed of their options. The question is whether Allstate acted in bad faith by relying on counsels veracity concerning the communications with the Hernandezes. The answer is no.

A breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself, and it has been held that [b]ad faith implies unfair dealing rather than mistaken judgment. . . . [Citation.] [Citation.] (Congleton v. National Union Fire Ins. Co. (1987) 189 Cal.App.3d 51, 59.) We have already explained that an insurance company may consider the advice of counsel when determining whether to accept a settlement offer. We conclude that the right of an insurance company to rely on counsels expertise includes the right to rely on the accuracy of counsels communications.

From Allstates perspective, the Hernandezes had been told that the claims would likely exceed policy limits and they chose to refuse the settlement offer, notwithstanding MM&Ks warning that they would most likely lose at trial and be subject to a judgment in excess of $3 million. The Hernandezes cannot point to anything that Allstate said or did that encouraged them to reject the August 5th offer. Although Durham did not personally investigate the claims or analyze the settlement offer, plaintiffs do not explain why Allstate could not rely on MM&Ks attorneys to properly and fully inform the Hernandezes of their options. At worst, Allstates decision to trust that MM&Ks attorneys accurately communicated to Allstate the process that led to the Hernandezes decision to reject the offer is a mistake in judgment, not bad faith.

Plaintiffs complain that the decision to reject the settlement offer should not have been left to the Hernandezes. We disagree. Ultimately, the Hernandezes faced the consequences of a judgment in excess of the policy limits, not Allstate. Where, as here, the insurer reasonably believes that the insured has been fully advised of the pros and cons of rejecting a settlement offer, we can discern no reason why the insured, the party at risk, should not have the right to make the ultimate decision.

Plaintiffs contend that because of Allstates conduct, the Hernandezes were forced to hire Agren and pay him in excess of $11,000. However, the Hernandezes decided to hire separate counsel after their meeting with the bankruptcy lawyer, an event set up by MM&K. As we have concluded that Allstate did not act in bad faith, it follows that it is not responsible for the Hernandezes attorney fees.

DISPOSITION

The judgment (the order granting summary judgment) is affirmed. Allstate is to recover its costs.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

SUZUKAWA, J.

We concur:

WILLHITE, Acting P. J.

MANELLA, J.

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[1] We refer to the individual members of the Valencia and Hernandez families by their first name to avoid confusion, with no disrespect intended.

[2] The individual named plaintiffs are: the estate of Gilda Valencia, by and through its successor-in-interest, Mario Garcia Valencia; Mario Garcia Valencia, an individual; Marie Amparo Valencia, an individual; Christina Schwalbe, an individual; and Al Valencia, an individual.

[3] Plaintiffs point to the fact that Durhams log indicates she did not see MM&Ks letter advising her of the Hernandezes decision to reject the August 5th offer until after the September 9 expiration date, and argue that Allstate cannot rely on that letter to claim that it was merely following the insureds directions. However, as MM&Ks attorneys met with the Hernandezes on September 6, there was sufficient time for the attorneys to advise Allstate that the Hernandezes wanted to settle the Valencias claim. Plaintiffs try to get around this fact by asserting there is no evidence that Allstate would have paid the claim if the request had been made. This is belied by the undisputed evidence that Durham knew from the outset that Hernandez was at fault and that Allstate would be required to pay policy limits.