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A named insured is being sued under the insured's liability policy for a tort sounding in a wrongful death action. The insured was served and appeared as a defendant, but has recently filed a bankruptcy action.
ISSUES
1. Assuming a favorable judgment in plaintiff's favor in the tort action, what effect would the defendant-debtor's personal bankruptcy have on that judgment?
2. What is the effect of a tort judgment in excess of a debtor's liability insurance?
3. May a plaintiff faced with an insured's personal bankruptcy sue that insured's liability carrier for bad faith refusal to settle within that insured's policy limits?
SUMMARY
1. Plaintiff may seek relief from the automatic stay in bankruptcy and proceed against defendant to the limits of defendant-debtor's available liability insurance.
2. The bankruptcy stay is routinely lifted if the bankruptcy estate is not harmed.
3. Ample case authority supports the inference that plaintiff can do so if he takes an assignment of the insured's right of action for bad faith. No reported case was found directly addressing the issue except those denying the right absent an assignment.
DISCUSSION
1. [Omitted.]
2. [Omitted.]
3. Insurer's duty to settle
The early cases considering the issue of an insurer's duty to settle third party claims against its insured arose in the context of an insurer that had undertaken the insured's defense and had then refused a settlement offer within the policy limits. Ivy v. Pacific Auto Ins. Co. (1958) 156 Cal.App.2d 652, 658-660, 320 P.2d 140; see also Shernoff, Gage, and Levine, Liability for Insurance Bad Faith Litiga- tion, Chap. 3, "Duties Under Liability Insurance Proceeds," sec. 3.02. The California Supreme Court expanded the concept, basing the insurer's duty to make a good faith settlement on the implied covenant of good faith and fair dealing implicit in all contracts. Johansen v. Calif. State Auto Ass'n Inter-Ins. Bureau (1975) 15 Cal.3d 9, 15-17, 123 Cal.Rptr. 288. This "contract" theory is important because it resur- faces in all subsequent attempts of third parties plaintiff to establish a right of direct action against bad faith insurers, including attempts within the last five years at the appellate level to turn California's Unfair Practices Act (re insurance companies) into a cause of action in favor of plaintiffs not a party to the insurance contract.
Under present law, when the judgment against an insured exceeds policy limits so that the most reasonable manner of disposing of the claim is a settlement within those limits, the insurers must settle the claim, if plaintiff offers to settle. Johansen, supra, 15 Cal.3d at 16. See also Calif. Ins. Code sec. 790.03(h)(5). In deciding whether or not to compromise the third party claim, the insurer must conduct itself as though it alone were liable for the entire judgment. Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429, 58 Cal.Rptr. 13; Betts v. Allstate (1984) 154 Cal.App.3d 688, 706, 201 Cal.Rptr. 528. Thus, the only permissible consider ation in evaluating the settlement offer's reasonableness becomes whether, in light of the victim's injuries and the insured's probable liability, the ultimate judgment may exceed the amount of the settlement offer. Johansen, supra, 15 Cal.3d at 9; Betts v. Allstate, supra, 154 Cal.App.3d at 706-707.
A list of the general factors to be considered in determining whether an insurer has breached its duty of good faith and fair dealing in failing to settle a third party claim is set forth in Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679, 689, 319 P.2d 69.
A. Insurer's duty to settle insurance it owed to the insuredA duty to settle a third party claim is owed to the insured, who may sue to recover damages for the breach thereof. Johansen, supra, 15 Cal.3d at 14-15. In this context, "insured" is not limited to the named insured, or to an insured who is a contracting party, but includes those who become additional insureds under the terms of the insurance policy, as well as express third party beneficiaries. Northwestern Mut. Ins. Co. v. Farmers Ins. Group (1978) 76 Cal.App.3d 1031, 1044, 143 Cal.Rptr. 415. But an injured, third party plaintiff is not a third party beneficiary of an insurance liability contract. Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 943-944, 132 Cal.Rptr. 424.
B. Assignment of the claimThe named insured may assign his claim or cause of action for breach of the duty to make a good-faith settlement without the insurer's consent, even when the policy provisions provide to the contrary. Murphy, supra, 17 Cal.3d at 942; Samson v. Transamerica (1980) 101 Cal.App.3d 220, 240-241, 178 Cal.Rptr. 343 (assignment in exchange for covenant not to sue or enforce excess judgment). The cause of action accrues only when a judgment in the third party action becomes final. Doser v. Middlesex Mut. Ins. Co. (1980) 101 Cal.App.3d 883, 891, 162 Cal.Rptr. 115. See general summary in Moradi-Shalal v. Fireman's Fund (1988) 46 Cal.3d 287, 308, 250 Cal.Rptr. 116; Calif. State Auto Ass'n v. Superior Court (1990) 50 Cal.3d 658, 662, 268 Cal.Rptr. 284.
But purely "personal" causes of action such as emotional distress or punitive damages are not assignable. It has been suggested that to avoid this problem, the insured could agree to bring a single bad faith action in his own name, agreeing to pay part of the recovery to the assignee. See City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 464, 115 Cal.Rptr. 797. (Again, a debtor cannot maintain litigation without the trustee's permission.) An alternate possibility is to secure a stipulated judgment from the insured, the insurer and plaintiff, reserving the right to plaintiff by assignment to proceed against the insurer for bad faith. See Calif. State Auto. Ass'n v. Superior Court, supra, 50 Cal.3d at 662; Fortman v. Safeco Ins. Co. of America (1990) 221 Cal.App.3d 1394, 1397, 271 Cal.Rptr. 117. An insured's right to assign a bad faith cause of action was again mentioned in Griffith v. State Farm Mut. Auto Ins. Co. (1991) 230 Cal.App.3d 59, 71, 281 Cal.Rptr. 165, in contradistinction to the disapproved attempts of third party plaintiffs to sue insurers under the Unfair Practices Act discussed in that opinion.
C. Insured's insolvencyInsurance Code section 11580 protects an injured third party from the insured's insolvency or bankruptcy. Malmgren v. Southwestern Automobile Ins. Co. (1927) 201 Cal. 29, 33, 255 P. 512; Johnson v. Holmes Tuttle Lincoln-Mercury, Inc. (1958) 160 Cal.App.2d 290, 298, 325 P. 2d 193. Case law has interpreted the statute to create a contractual relationship that inures to the benefit of any person who may be negli- gently injured by the insured. Johansen, supra, 160 Cal.App.2d at 298; Zahn v. Canadian Indemnity Co. (1976) 57 Cal.App.3d 509, 512, 129 Cal.Rptr. 286. The literal effect of section 11580(b)(2) is to make the injured party a third party beneficiary of the insurance contract. Shapiro v. Republic Indemnity Co. of America (1959) 52 Cal.2d 437, 341 P.2d 289. But that third party must secure a judgment establishing the insolvent insured's liability. Zahn, supra, 57 Cal.App.3d at 513. Note, however, that these decisions simply indicate that an insurer cannot escape liability simply because an insured has filed bankruptcy. Although the opinion's language spawned much "third party beneficiary" litigation, these decisions have not been expanded into a direct action right enjoying all incidents of an insured's direct contract rights as against a bad faith insurer.
D. No recovery by third parties from breach of insurer's duty to settle absent an assignment from the insuredIn Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 132 Cal.Rptr. 424, the California Supreme Court held that the implied covenant of good faith and fair dealing, on which the duty to settle is premised, is a "term" of the contract within the meaning of Insurance Code section 511580 (b)(2), but that the injured party, absent an assignment from the insured has no independent right to any recovery in excess of the policy limits for the insurer's failure to settle. Id., 17 Cal.3d at 942-944. See Coleman v. Gulf Ins. Group (1986) 41 Cal.3d 782, 226 Cal.Rptr. 90, for other theories available to an injured third party for an insurer's refusal to settle or to pay a judgment.
CONCLUSION
1. [Omitted.]
2. [Omitted.]
3. California permits assignment of a bad faith claim on the theory that an insured's contract rights are assignable at law. Lack of such an assignment plainly prevents a third party from a direct action against a bad faith insurer on that ground. Research revealed no cases dealing specifically with an insurance company seeking to use its insured-debtor's bankruptcy as a shield against bad faith damages because the bankruptcy action shields the insured from damage. But the plethora of cases in the bad faith area and the continued insistence in high court opinions that a bad faith claim is assignable make it clear that such a position by an insurer would be viewed as violating this state's very strong public policy requiring good faith settlement of third party claims.