An Excess Judgment Can Be Recovered as Damages in a Contract Action Based Upon a Breach of the Covenant of Good Faith in an Insurance Policy

The Statute of Limitations is Equitably Tolled During the Time Between Entry of a Judgment and the Date That it Becomes Final

Archdale v. American International Specialty Lines Insurance Co. (Aug. 22, 2007, B188432, Second Appellate District, Division Three)
Opinion on Rehearing
43 page opinion

There is extensive case law concerning tort liability for breach of the covenant of good faith and fair dealing in insurance contracts but considerably less about contract actions based upon breach of the covenant. Fewer plaintiffs elect to pursue a contract claim because a tort claim permits recovery of greater damages. Emotional distress damages, punitive damages and Brandt fee awards are available in tort claims but do not qualify as contract damages. This opinion discusses a contract cause of action based upon breach of the covenant.

In the underlying action a multi-vehicle collision led to a lawsuit by the Archdales (the appellants here) against the driver of the truck that caused the accident and his employer. American International Specialty Lines Insurance Company (AIS), the company's insurer provided a defense and apparently acknowledged coverage. The policy limits were $500,000. Before trial the Archdales offered to settle for policy limits but AIS rejected the settlement offer. The trial resulted in a judgment of $1,292,495 in favor of the Archdales. After it rejected the Archdales settlement offer, AIS settled with another claimant from the same accident for $142,500. Following an unsuccessful appeal of the underlying judgment, AIS paid the Archdales the $357,500 remaining on the policy.

In this action the Archdales pursued the truck driver's contract causes of action against AIS (breach of express policy provisions and breach of the implied covenant) which had been assigned to them by the truck driver. The truck driver himself pursued his unassignable purely personal tort claim for emotional distress.

Statute of Limitations, Equitable Tolling and Assignment
The trial court granted AIS summary judgment based upon the statute of limitations because the judgment in the underlying action had been entered on May 3, 1999 and this action was filed on Sept. 12, 2003.

The Court of Appeal upheld the summary judgment against the truck driver because the two year statute on his tort action had run before this action was filed. However, the court concluded that the Archdales' contract claims were timely because the statute of limitations had been equitably tolled between the May 3, 1999 entry of the judgment and Nov. 27, 2001, when the judgment became final after remittur issued following the appeal.

There was evidence that although the Archdales' Sept. 12, 2003 complaint was based upon the assignment to them of the truck driver's contract claims, those claims were not actually assigned to them until Sept., 2004. However, the four year limitations period still had not run by Sept., 2004 which meant that the retroactive assignment did not prejudice AIS and therefore it was not barred by Civil Code section 2313.

Contract Action for Breach of the Covenant of Good Faith and Fair Dealing
The Court found that the Archdales' cause of action for breach of an express contract provision failed because there were no allegations of such a breach. AIS had provided a defense and had paid out the policy limits. The cause of action for breach of the implied covenant, however, stated a valid cause of action.

An 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 fair dealing. If the failure to settle leads to an excess judgment, that excess judgment is a consequential of the breach within the meaning of Civil Code 3300 and therefore is recoverable in a contract action.

An insurer has a duty to accept a reasonable offer to settle a claim against its insured. The Court quoted the following language from Johansen v. California State Auto. Assn. Inter-Ins Bureau (1975) 15 Cal.3d 9, 16 as the standard for determining if a settlement offer is reasonable: "the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim's injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer. Such factors as [1] the limits imposed by the policy, [2] a desire to reduce the amount of future settlements, or [3] a belief that the policy does not provide coverage should not affect a decision as to whether the settlement offer in question is a reasonable one."
Justice Croskey wrote the opinion. Presiding Justice Klein and Justice Kitching concurred.

Comment: The Court here was dealing with a summary judgment based upon a statute of limitations defense. The merits of the contract action had not been litigated. The issue of the reasonableness (and the associated evidence) of the Archdales' settlement offer was not before it. In footnote 23 the Court noted the existence of case law stating that the size of the judgment furnishes an inference of the value of the claim. A question not before the court, but perhaps on the minds of practitioners, is how to ensure that an insurance company fulfills its good faith duty to its insured when there are multiple claimants, as there were here after the multi-vehicle collision? Even if a claimant's damages indisputably exceed the policy limits, can the insurance company pay the full policy amount when there are other claims? That leaves the insured exposed for the complete amount of those other claims, a very serious situation for the insured if those claims are also substantial. In addition, once the policy limits have been paid there is no additional coverage and when there is no possibility of coverage can there be any duty to defend? These are questions that the trial court will may have to address during the trial of this action.