ACHIEVING COMPLETE RECOVERY IN

THIRD PARTY BAD FAITH CASES

There are four theories which permit a judgment credit under an automobile policy
to recover for bad faith.

1. 11580 Third Party Beneficiary Rights Against Insurer:

Under 11580, he has direct action against insurer. The theory is that as a judgment
creditor the third party judgment creditor is now an intended beneficiary of the
insurance contract. Under this theory, the judgment creditor may only recover on
those provisions which were “intended to benefit” the third party.

A judgment creditor may enforce both the express as well as the implied terms of
the insurance contract. A judgment creditor may thus sue for breach of the
implied covenant of good faith and fair dealing, i.e., bad faith. (Hand v. Farmers
(1994) 23 Cal.App. 4th 1847, 1858.)

However, not all aspects of the covenant were intended to benefit the third party
judgment creditor. (Murphy v. Allstate (1976) 17 Cal.3d 937).

a. Excess Judgment

The Murphy court considered whether under 11580 third party beneficiary theory,
third party claimant had a right to recover the excess judgment. Murphy held that
the duty to settle does not run to the third party beneficiary. Therefore, as an
11580 third party beneficiary theory may not recover the excess judgment.

b. Defense Obligation

In Jane D. v. The Ordinary Mutual (1995) 32 Cal.App.4th 643, the appellate court
considered whether the parties to an insurance contract intended to benefit a
judgment creditor. Relying on Murphy, the court reasoned that the duty to defend
did not intend to benefit the judgment creditor. This provision was intended solely
for the benefit of the insured. Therefore, without an assignment, a judgment
creditor had no right to enforce the insurer’s obligation to defend an insured. (Id.
at 651.)
 c. Duty to Investigate

In Murphy v. Allstate, supra, 17 Cal.3d at 944 in analyzing whether the duty

to settle was intended to benefit the third party judgment creditor, it distinguished
the duty to settle from the duty to investigate. Unlike a failure to investigate the
representations of the insured (as to insurability), a breach of the duty to settle
does not involve the risk that a person injured by a negligent motorist will fail to
receive the compensation called for by that law.

d. Supplementary Payments

The Supplementary payments clause of a policy provides for payments of interests

and costs, outside policy limits.

In San Diego Housing Authority vs. Industrial Indemnity (2002) 95 Cal.App.4th

669, the appellate court considered whether the parties to the insurance contract
intended to benefit a judgment creditor under supplementary payments provision.

The court reasoned that providing for costs is a function of the insurer's
defense obligation, not its indemnity obligation and therefore it would not infere
an intent to benefit the judgment creditor. (Id. at 689.) Therefore, the court
refused to permit a judgment creditor to enforce supplementary payments.

e. Bad Faith Appeal

In Coleman v. Gulf Insurance Company (1985) 41 Cal.3d 782 the

California Supreme Court considered whether a judgment creditor may sue for an
insurer’s post-judgment bad faith appeal. The Supreme Court cited Code of Civil
Procedure section 907 which permits the appellate court to impose costs and
sanctions for a frivolous appeal. (Id. at 788.) The court also cited Tellefsen v. Key
System Transit Lines (1961) 198 Cal.App.2d 611, 613 for the proposition that
abuse of process will not lie when a party merely exercises its right to appeal.
[“[M]erely taking a frivolous appeal is not enough to constitute an abuse of
process.”] (Id. at 792.) Finally, the Supreme Court held that the right to appeal is
part of the defense obligation and as set forth in Murphy and its progeny, “the
third party beneficiary doctrine does not generally provide a basis for a third party
claimant to recover in this context, because the implied duty to settle is ordinarily
intended to benefit the insured and not the injured claimant. (Id. at 795.)

2. Rights Under Assignment:

California, as set forth both in case law and by statute, maintains a policy
encouraging the free transferability of all types of property. (See Civ.Code, §§
954, 367, 1044, 1458; Farmland Irrigation Co. v. Dopplmaier (1957) 48 Cal.2d
208, 222; Robert H. Jacobs, Inc. v. Westoaks Realtors, Inc. (1984) 159 Cal.App.3d
637, 645.) “[I]t is a fundamental principle of law that one of the chief incidents of
ownership in property is the right to transfer it.” (Bias v. Ohio Farmers Indemnity
Co. (1938) 28 Cal.App.2d 14, 16.)

This “chief incident of ownership” applies equally to tangible and intangible forms
of property, including causes of action. Originally codified in 1872, section 954
states: “A thing in action, arising out of the violation of a right of property, or out
of an obligation, may be transferred by the owner.” An assignment is a commonly
used method of transferring a cause of action.

As a general proposition it can be said ‘ “that the only causes or rights of action
which are not transferable or assignable in any sense are those which are founded
upon wrongs of a purely personal nature, such as slander, assault and battery,
negligent personal injuries, criminal conversation, seduction, breach of marriage
promise, malicious prosecution, and others of like nature. All other demands,
claims and rights of action whatever are generally held to be transferable.” ’ ” (
Reichert, supra, 68 Cal.2d at p. 834, 69 Cal.Rptr. 321, 442 P.2d 377, quoting
Wikstrom v. Yolo Fliers Club, supra, 206 Cal. at p. 463, 274 P. 959.)

As a general rule, all rights under the insurance policy are therefore assignable
except emotional distress damages and punitive damages.

a. Excess Judgment:

When the carrier does breach its duty to settle, the insured has been allowed
to recover excess award over policy limits (Comunale v. Traders & General Ins.
Co. (1958) 50 Cal.2d 654, 659), economic loss (Crisci v. Security Ins. Co. (1967)
66 Cal.2d 425,), physical impairment (Silberg v. California Life Ins. Co. (1974) 11
Cal.3d 452), emotional distress (Silberg v. California Life Ins. Co., supra;
Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566; Crisci v. Security Ins. Co.,
supra), and punitive damage (Silberg v. California Life Ins. Co., supra).

Because the duty to settle is assignable and the right to recover the excess
judgment is an economic loss not a personal right, the assignee judgment credit
may recover the excess judgment for breach of the duty to settle.

b. Brandt Fees

In a tort action for wrongful denial of policy benefits, Brandt allows the
insured to recover as tort damages only the attorney fees incurred to obtain the
policy benefits wrongfully denied. ( Brandt, supra, 37 Cal.3d at p. 819, 210
Cal.Rptr. 211, 693 P.2d 796.) But attorney fees expended to obtain damages
exceeding the policy limit or to recover other types of damages are not recoverable
as Brandt fees. ( Ibid.; see Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 811-
812, 16 Cal.Rptr.3d 374, 94 P.3d 513 [attorney fees to obtain emotional distress
damages and punitive damages not recoverable under Brandt ].)

Essex Ins. Co. v. Five Star Dye House, Inc. (2006) 38 Cal.4th 1252 held
that the insured’s right to claim Brandt fees is assignable.

3. 11580 Judgment Creditor’s Rights and the Financial Responsibility

Laws

In Barrera v. State Farm Mut. Automobile Ins. Co., supra, 71 Cal.2d 659,
670, this court held that Insurance Code section 11580 must be read in light of the
Financial Responsibility Law and that its underlying policy providing benefits to
injured parties may not be limited by third party beneficiary law. On the basis of
that policy, it was held that in an action by the injured claimant,
misrepresentations by the insured do not constitute a defense for an insurer who
failed to promptly investigate insurability. (Cf. Shapiro v. Republic Indem. Co. of
America (1959) 52 Cal.2d 437, 440.)

Therefore, we should be able to get at TUIC’s bad faith underwriting in

violation of 11580.2.

4. Post-Judgment 11580 Direct Rights Against Insurer.

Section 11580 operates as part of a larger body of California law that seeks
to assure that accident victims will be securely compensated through automobile
policies. (See Barrera, supra, 71 Cal.2d at p. 672, 79 Cal.Rptr. 106, 456 P.2d 674.)
“The public policy expressed in the Financial Responsibility and related laws
requires that we construe statutes applicable to automobile liability insurance
policies, as well as contractual provisions in those policies, in light of its purpose
to protect those who may be injured by the use of automobiles.” ( Ibid.)
Accordingly, the insurer's policy duty to pay adjudicated liabilities is in place as
much to protect adjudicated injured parties from uncompensated loss as to protect
the insured from personal financial disaster.

In Hand v. Farmers (1994) 23 Cal.App.4th 1847, 1858, once having

secured a final judgment for damages, the plaintiff becomes entitled to recover on
the judgment on the policy. At that point the insurer's duty to pay runs
contractually to the plaintiff as well as the insured. The duty not to withhold in
bad faith payment of adjudicated claims runs in favor of a judgment creditor.
 Thus, the insurer owes a duty to exercise good faith in not withholding
adjudicated damages owing to the judgment creditor. [See Hand v. Farmers Ins.
Exch. (1994) 23 CA4th 1847, 1859, 29 CR2d 258, 266--insurer continued to
unreasonably deny coverage and refused payment of judgment; see also San Diego
Housing Comm'n v. Industrial Indem. Co., supra, 96 CA4th at 687, 116 CR2d at
117 (citing text); see also Low v. Golden Eagle Ins. Co. (Gluckman) (2002) 101
CA4th 1354, 1368.]

Traditionally, damages for breach of the duty to pay include not only the economic
loss but also for post-judgment emotional distress and punitive damages and it
should permit Brandt fees for enforcing the judgment.

Allowing a judgment creditor to recover for postjudgment bad faith has

been criticized as inconsistent with Ins.C. § 11580(b)(2), which limits recovery to
an action "on the judgment" and subject to the policy's "terms and conditions."
One case states, "the analysis in Hand might be viewed as improperly extending
the law of tortious bad faith." [Hughes v. Mid-Century Ins. Co. (1995) 38 CA4th
1176, 1184, 45 CR2d 302, 307 (declining, however, to decide the issue); see also
Maxwell v. Fire Ins. Exch. (1996) 60 CA4th 1446, 1452, 70 CR2d 866, 869
(denying judgment creditor's claim for emotional distress damages)--"To the
extent that Hand ... could be deemed inconsistent with the principles we have
enunciated, we decline to follow it"] :

Supplemental Payments Ccoverage:

The judgment creditor is entitled to recover "on the policy and subject to its
terms and conditions" (Ins.C. § 11580(b)(2)). Presumably recovery "on the policy"
extends to amounts payable under the policy's "supplemental payments coverage"-
-which includes costs taxed against the insured and prejudgment interest .

Costs and prejudgment interest:

According to one case, however, costs of suit taxed against the insured and
prejudgment interest are not recoverable under § 11580(b)(2). These items are
"clearly linked" to the insurer's duty to defend and therefore are recoverable only
by the insured, and not by the injured party suing as judgment creditor of the
insured. (San Diego Housing Comm'n v. Industrial Indem. Co. (2002) 95 CA4th
669, 693.)

Comment: This seems debatable. Prejudgment interest, in particular, does

not seem to be "clearly linked" to the insurer's duty to defend.

Collateral Estoppel Effect

a judgment against the insured may be entitled to collateral estoppel effect
in the judgment creditor's action to enforce the policy on issues adjudicated in the
liability action; e.g., the insured's liability and amount of the third party's damages.
(Garamendi v. Golden Eagle Ins. Co. (2004) 116 CA4th 694, 710; Pruyn v.
Agricultural Ins. Co. (1995) 36 CA4th 500, 516-517.)

Denise Jarman ©
denise@jarmaninsurancelaw.com

Denise Jarman is an attorney practicing

insurance coverage and bad faith law.
She is a candidate for the CPCU designation
in commercial lines. She has tried over
38 cases to verdict.

Denise Jarman
LAW OFFICE OF DENISE JARMAN
Insurance Law Since 1979
140 B Street, Suite 5
Davis, CA 95616
(916) 607-5692
denise@jarmaninsurancelaw.com