Delgado v. Interinsurance Exchange of the Automobile Club of Southern California
(Cal.App. 2007) ___ Cal.App.4th___, 07 C.D.O.S. 5898

Denial Of Defense Of Complaint Alleging Intentional Tort And Alternatively Negligence Is Breach Of Contract And Breach Of Covenant Of Good Faith And Fair Dealing When Made Without Justification And In The Absence Of Extrinsic Facts Negating Potential For Coverage

The California Court of Appeal for the Second Appellate District reversed a trial court order sustaining a demurrer without leave to amend and dismissing a complaint for breach of contract, breach of the covenant of good faith and fair dealing and recovery of a stipulated judgment pursuant to Insurance Code § 11580(b)(2). The Court of Appeal held that a complaint that alleged an intentional assault and, in the alternative, the insured had negligently engaged in self-defense, gave rise, as a matter of law, to a potential for coverage. Therefore, the carrier had a duty to defend, particularly where there was no claim the carrier had any extrinsic facts that eliminated the potential for coverage. The Court also found the carrier's denial of a defense constituted bad faith as a matter of law where the denial was made without justification, investigation, and solely based on the contents of the complaint itself. The Court of Appeal concluded the plaintiff could proceed with his "direct action" claim under Ins. Code § 11580 because the reasonableness of the settlement between the insured and claimant could not be determined on demurrer. In addition, the Court noted that whether the carrier owed a duty to indemnify could not be resolved on demurrer because that question turned on whether there was actual coverage under the policy.

Interinsurance Exchange of the Automobile Club of Southern California ("ACSC") issued a homeowners policy to Craig Reid. Jonathan Delgado filed suit against Reid alleging he had kicked and struck Delgado. Delgado alleged two causes of action. In one he alleged Reid's actions were intentional, unprovoked and without justification. In the other he alleged, alternatively, that Reid's actions were negligent and that Reid negligently and unreasonably believed he was acting in self-defense when he kicked and struck Delgado.

Reid tendered his defense to ACSC which denied coverage on the ground there was no "occurrence" (defined as an accident) and that Reid's conduct was within the scope of the policy's intentional/willful acts exclusion or Ins. Code § 533. ACSC relied solely on the allegations of the complaint, did not conduct an investigation, and did not contend it was aware of any extrinsic facts precluding the potential for covered liability.

Reid and Delgado settled their dispute. The parties entered a stipulated Judgment of $150,000 and Reid agreed to pay Delgado $25,000 and assigned Delgado all of his rights against ACSC in exchange for a partial satisfaction of judgment and a covenant not to execute on the balance.

Delgado filed suit against ACSC. Delgado's amended complaint was attached and incorporated the terms of the policy, ACSC's letter denying coverage, and the underlying complaint against Reid. The complaint incorporated the stipulated facts from the underlying case, including that Reid had engaged in a "negligent use of excessive force in the exercise of his right of self defense." The trial court sustained ACSC's demurrer to the amended complaint without leave to amend noting that merely framing the underlying incident in terms of negligence was not conclusive of the duty to defend and that characterizing an assault and battery as an "accident" was disingenuous. In addition, the trial court noted the absence of facts to support the conclusion Reid believed he was acting in self-defense.

The Court of Appeals noted that it was reviewing a ruling on a demurrer and therefore assumed all facts alleged in the complaint to be true. It noted that the central question was whether "the underlying complaint or other facts available to ACSC gave rise to a potential liability under the policy." The Court concluded that the case was similar to Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 275, in which an insured tendered an assault claim with a letter to the carrier that he had acted in self-defense. The California Supreme Court in Gray held that where a complaint alleging intentional excluded conduct could have been amended to allege negligent conduct within the scope of coverage of the policy, there was a duty to defend. Although the Court of Appeal did not discuss the policy language at issue in Gray, the policy's insuring agreement did not contain an "occurrence" or other similar limitation in the insuring agreement. The only policy language at issue in Gray was an exclusion for intentionally caused bodily injury. In addition, the Court relied on Mullen v. Glens Falls Ins. Co. (1977) 73 Cal.App.3d 163, which also focused its analysis on expected or intended injury rather than whether the cause of the injury was an intentional act.

The Court of Appeal concluded that Delgado's amended complaint alleged the potential for Reid to be found liable for "unintentional conduct." The Court of Appeals held that, particularly where there was no claim ACSC had any extrinsic facts eliminating the potential for coverage, it was error for the trial court to sustain the demurrer.

The Court also held the trial court erred in concluding, on demurrer, the stipulated judgment was "contrived." Citing and relying on Pruyn v. Agricultural Ins. Co. 91995) 36 Cal.App.4th 500, the Court noted that an insured that has been abandoned by its carrier is entitled to make the best settlement it can, including one that involves a stipulated judgment in exchange for a covenant not to execute. If the settlement is reasonable and free from collusion and fraud, the settlement operates as presumptive evidence of the insured's liability and the amount of that liability. A settlement does not, however, establish coverage for the amounts paid or to be paid in settlement. In addition, because issues of reasonableness, fraud and collusion are factual questions, they cannot be decided on demurrer.

Whether ACSC has a duty to indemnify, and whether any breach of the duty to indemnify was in bad faith, also involved factual issues that could not be resolved on demurrer.

However, the Court concluded that ACSC did not have proper cause or act reasonably in denying Reid a defense to Delgado's complaint which alleged, at least in the alternative, that Reid had acted negligently. The factual dispute evidenced on the face of the complaint established the duty to defend and it was, in the Court's view, a breach of the covenant of good faith and fair dealing as a matter of law not to defend. (The Court's opinion does not make clear how this was an issue for review given that a demurrer is addressed to the adequacy of the pleadings.)

Finally, the Court held that whether Delgado suffered any damages as the result of ACSC's failure to defend and, if so, the amount of those damages, was not alleged. Those were issues that would have to resolved on remand by the trial court.

Accordingly, the Court of Appeal reversed the trial court's order sustaining the demurrer and remanded the case for further proceedings consistent with its opinion.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

Click here for opinion.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.