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The Court of Appeal, Second District on rehearing of now republished 152 Cal.App.4th 717, reversed in part and affirmed in part an order of the Los Angeles County Superior Court granting summary judgment in favor of the insurer, holding the trial court properly denied tort and breach of contract claims, but erroneously denied a claim for breach of the implied covenant of good faith and fair dealing where the claim was contract relief governed by the four year statute of limitations, and a retroactive assignment of rights occurred prior to its expiration.
American International Specialty Lines Insurance ("AIS") provided an automobile liability policy to Arrow Ready, with a limit of $500,000. This policy covered Arrow Ready's employee, Godinez, when he was involved in a multi-vehicle collision. The Archdales filed a complaint for personal injuries on against Godinez and Arrow Ready for damages sustained in the accident. AIS provided a defense to Arrow Ready and Godinez. This underlying action proceeded to trial and a judgment was entered in favor of the Archdales on May 3, 1999, ordering Godinez, Arrow Ready, and another defendant, Fellendores, to pay the Archdales $1,269,000 in damages.
On August 30, 1999 the trial court vacated the judgment entered on May 3, 1999 and entered an "Amended Judgment" on October 15, 1999. The Amended Judgment ordered the Archdales to recover from only Godinez and his employer and for a total of $1,292,495, plus interest. This judgment was appealed and affirmed by the Court of Appeal on September 14, 2001. A remittitur was issued on 11/27/01.
The Archdales and Godinez (Plaintiffs) filed the instant action on September 12, 2003, alleging claims for breach of contract and breach of the covenant of good faith and fair dealing. Godinez asserted a tort claim against AIS. Plaintiffs asserted AIS' failure to accept multiple reasonable settlement offers within the policy limit resulted in an excessive judgment against Godinez and Arrow.
Plaintiffs assert the Archdales made several settlement offers to AIS prior to trial in the underlying action, for $502,000 and later for $500,000. Prior to the instant action, AIS settled with another claimant for $142,500 and paid the balance of the policy to the Archdales on April 23, 2002, for a sum of $357,500. (No issue is raised in the decision regarding an insurer's obligations when addressing multiple claimants whose claims exceed available limits.)
Plaintiffs assert that Arrow Ready and Godinez assigned their contract rights against AIS to the Archdales prior to the filing of the instant action on September 12, 2003. Arrow Ready dismissed its claims without prejudice on March 21, 2005. Thereafter, only the Archdales and Godinez remained as Plaintiffs.
On April 1, 2005, AIS moved for summary judgment arguing plaintiff's claims were time barred. AIS asserted the four year limitations provision for breach of written contract set forth in Code of Civil Procedure section 337 barred Plaintiffs' claims. AIS argued any breach of contract began to run on May 3, 1999, the date the original judgment was entered, and expired four months before the instant case was filed on September 12, 2003. AIS asserted Plaintiffs' cause of action for breach of the implied covenant of good faith and fair dealing was barred by a two year statute of limitations pursuant to Code of Civil Procedure section 339(1). AIS claimed it could not be held liable for breach of contract because it provided a defense in the underlying action and paid out the full amount of its policy limit prior to the instant lawsuit.
On April 25, 2005, AIS deposed Godinez since the Archdales' rights to pursue the first and s3econd causes of action in their complaint depended upon the validity of the assignment of rights from Godinez. (Note, a third cause of action alleged in the complaint under Insurance Code section 11580 was abandoned by the Archdales and is not discussed here. Godinez testified that he signed "the assignment of action in exchange for covenant not to execute on October 4,1 004," that he first spoke to his attorney in September 2004, and did not learn of the judgment against him until that time.
Thereafter, AIS argued the Archdales lacked Godinez' authority to file the instant lawsuit (at least concerning the first two causes of action) on September 12, 2003, citing Civil Code section 2313. AIS asserted Godinez' alleged authorization and assignment to the Archdales did not occur until a year after the instant action was filed and could not be applied retroactively to save claims that were already time barred. The court gave AIS leave to file an amended motion.
The trial court found the assignment of rights by Godinez did not occur until October 4, 2004, that this lawsuit was filed without the authority of Godinez, and that the Archdales could not be proper Plaintiffs for the breach of contract and breach of implied covenant claims. The trial court held the statute of limitations expired by September, 2004 "and any effort by Godinez to retroactively ratify counsel's actions was ineffective to avoid that limitations bar." Judgment was entered in favor of AIS on November 3, 2005 and Plaintiffs appealed.
Plaintiffs argued that even if the authorization did not occur until September of 2004, AIS was not harmed because the four year limitations period had not expired. AIS disputed each contention and asserted plaintiffs could not recover for bad faith for failure to settle except in tort, which had a two year limitations period.
The Court of Appeal affirmed the lower court's denial of the tort claim and the denial of the Archdales' claim for breach of contract. Regarding the latter point, the Court found AIS had fully performed its express contractual obligations by providing a defense to Godinez and his employer and by paying out its full policy limit pursuant to the judgment rendered in the underlying action. The Court made this finding fully knowing that AIS had not paid its policy limit in settlement prior to the judgment.
The Court reversed the denial of the Archdales' claim for breach of the covenant of good faith and fair dealing, holding:
(1) where a liability insurer has provided a defense and, prior to the filing of an action by an insured (or assignee), has fully paid out the amount of its policy limit, it may not be liable for the breach of any express policy provision promising such benefits, but nonetheless could be held liable for a breach of the implied covenant of good faith and fair dealing;
(2) in insurer's failure to accept a reasonable settlement offer to resolve a third party claim against its insured constitutes a breach of the covenant of good faith and dealing implied in a liability policy;
(3) such a breach, if it results in an excess judgment against the insured, will support a claim sounding in contract as well as tort;
(4) the amount of the excess judgment is a consequential damage of such a breach within the meaning of Civil Code section 3300 and is contract damages, within an applicable limitations period for the relief is four years (Code of Civil Procedure section 337, subd. (1));
(5) while an insured's claim against an insurer arising from a failure to accept a reasonable settlement offer will accrue upon the entry of an excess judgment in the underlying action, the running of the limitations period is tolled until the time for appeal has expired or, if an appeal is taken, until entry of a final judgment and the issuance of remittitur; and
(6) Civil Code section 2313 will not invalidate an insured's retroactive assignment of a claim against his or her insurer if the assignment is made prior to the expiration of the relevant limitation period on that claim.
In reaching its decision, the Court held plaintiffs claim for breach of the implied covenant of good faith and fair dealing was tolled from May 3, 1999 (when judgment was entered in excess of the policy limit) until remittitur was issued on November 27, 2001. Since the Archdales had until November 27, 2005, to file their complaint, AIS did not have a statute of limitations defense against this claim for contract damages resulting from breach of the implied covenant when the complaint was filed on September 13, 2003, or when Godinez assigned his rights to the Archdales on October 4, 2004. Accordingly, AIS was not prejudiced by the retroactive authorization of the filing of the complaint or retroactive assignment of rights to the Archdales.
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