Delgado v. Interinsurance Exchange of the Automobile Club of Southern California
(Cal.App. 2007) ___ Cal.App.4th___, 07 C.D.O.S. 7413

Court Of Appeal Grants Petition For Rehearing And Issues New Opinion Vacating Prior Holding That Insurer's Denial Of Defense Was Bad Faith As A Matter Of Law

On June 21, 2007, the California Court of Appeal for the Second Appellate District granted a petition for rehearing of its order in Delgado v. Interinsurance Exchange of the Automobile Club of Southern California, (Cal.App. 2007) ___ Cal.App.4th___, 07 C.D.O.S. 5898 ("Delgado") and vacated that order and opinion. One court day later, on June 25, 2007, without any further briefing or argument, the Court issued a new opinion in the case.

The Court's original decision in Delgado had reversed a trial court order sustaining a demurrer without leave to amend and dismissing a complaint against the insurer, Interinsurance Exchange of the Automobile Club of Southern California ("ACSC"), 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). ACSC had declined to defend an underlying action which, as we previously reported, involved a complaint alleging against the insured, alternatively, an unprovoked assault and negligent self-defense.

ACSC declined to defend based on its policy's "occurrence" definition, which requires an "accident," and its intentional injury/willful acts exclusion. The Court held, initially, it was bad faith as a matter of law for ACSC to decline to defend. The Court's new opinion deletes all references to this prior, now vacated, conclusion. Instead, the Court now holds the insured's complaint alleged facts sufficient to state a claim for bad faith breach of the duty to defend.

The opinion following rehearing maintained most of the Court's other holdings as set forth in the initial decision. These include that the allegations of the underlying complaint gave rise to a potential for coverage. The Court also maintained its initial holding that the plaintiff, who was the judgment creditor of the insured, 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 ACSC owed a duty to indemnify could not be resolved on demurrer because that question turned on whether there was actual coverage under the policy.

ACSC issued a homeowners policy to Craig Reid. Jonathan Delgado filed suit against Reid alleging Reid had physically attacked 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 Reid's actions were negligent and that Reid unreasonably believed he was acting in self-defense when he struck Delgado. Reid tendered his defense to ACSC which declined coverage on the ground there was no "occurrence" and that Reid's conduct was within the policy's intentional/willful acts exclusion or Ins. Code § 533. The original opinion concluded ACSC had relied solely on the allegations of the complaint, did not appear to have conducted an investigation, and did not contend it was aware of any extrinsic facts precluding the potential for covered liability. The Court's opinion following rehearing omits these statements. Instead, the Court noted the record did not demonstrate ACSC had undisputed extrinsic facts which eliminated the potential for coverage. In addition, the Court acknowledged that ACSC's petition for rehearing alleged ACSC had learned of facts after receiving the tender tending to negate the allegation that a negligent use of force had occurred.

Reid and Delgado settled their dispute. Delgado dismissed his intentional assault claim and the parties stipulated Reid had engaged in a "negligent use of excessive force in the exercise of his right of self defense." The parties entered a stipulated Judgment of $150,000 and Reid agreed to pay Delgado $25,000. Reid 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 complaint incorporated the stipulated facts from the underlying case, the terms of the policy and ACSC's denial letter. The trial court sustained ACSC's demurrer 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 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 Appeal noted it was reviewing a ruling on a demurrer and therefore assumed all facts alleged in the complaint to be true. 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 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 insurer advising he had acted in self-defense. California's Supreme Court 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. The Court of Appeal in Delgado did not discuss the language of the insuring agreement at issue in Gray which lacked an "occurrence" or other similar limitation. The only policy language at issue in Gray was an exclusion for intentionally caused bodily injury.

The Court of Appeal concluded Delgado's amended complaint alleged the potential for Reid to be found liable for "unintentional conduct" and hence gave rise to a duty to defend. The decision following rehearing added to the Court's initial discussion of this issue. The Court disagreed with ACSC's contention that Delgado's amended complaint alleged Reid's blows were intentional, and not accidental, even if he was acting in self-defense.

The Court reasoned that when one acts reasonably in self-defense the conduct is not even tortious. From this the Court concluded excessive force used in self-defense is properly characterized as non-intentional tortious conduct and a form of negligence. Since the term "accident" is not defined in the policy, excessive force used in self-defense qualifies as an "accident" since an "accident" exists "when any aspect in the causal series of events leading to the injury . . . was unintended by the insured and a matter of fortuity." (Citing Merced Mut. Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41, 50.) However, the Court held that whether ACSC had a duty to indemnify, and whether any breach of the duty to indemnify was in bad faith, involved factual issues that could not be resolved on demurrer.

The Court also retained its initial holding that the trial court erred in concluding, on demurrer, the stipulated judgment was "contrived." Citing Pruyn v. Agricultural Ins. Co. 91995) 36 Cal.App.4th 500, the Court stated that an insured that has been abandoned by its insurer 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 amounts paid or to be paid in settlement. Because issues of reasonableness, fraud and collusion are factual questions, they cannot be decided on demurrer.

Departing from its initial holding that ACSC's decision to decline to defend was bad faith as a matter of law, the Court found only that the facts alleged were sufficient to state a claim for bad faith. The Court acknowledged that if ACSC had been aware of extrinsic facts tending to negate the allegation the insured had negligently used excessive force in self-defense "[s]uch evidence may well be sufficient to conclusively negate coverage." ACSC's evidence would have to be presented at trial or in support of a motion for summary judgment and could not be considered on demurrer.

The Court of Appeal reversed the trial court's judgment of dismissal and remanded the case to the trial court with directions to conduct further proceedings not inconsistent with its decision.

Pursuant to California Rule of Court, Rule 8.268(d), the previously published opinion in Delgado has been vacated and cannot be cited. The opinion following rehearing is not final. Should a petition for rehearing be filed, or review granted by the Supreme Court, the opinion would be unavailable for use as authority in other cases.

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