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To Stipulate for Entry of Judgment or Not to Stipulate: That is the Question

To Stipulate for Entry of Judgment or Not to Stipulate: That is the QuestionThis is an area that requires special handling in order to properly resolve claims and maintain your right to collect judgments against insurance carriers under stipulated judgments.

Crackhead Craig was visiting his friend Speedball Bobby. Speedball owned a monster truck and frequently competed in monster truck competitions. Speedball gave Crackhead permission to take the monster truck for a spin around San Diego. Unbeknownst to Speedball, Crackhead Craig smoked some crack before driving the monster truck down Broadway. Crackhead drove the truck at a high rate of speed and ultimately ran over the Honda Civic being operated by your client, Eggshell Eddie. Eggshell’s treating doctor diagnosed him as suffering from three herniated discs and recommended fusion surgery.

Eggshell hires you and you file suit against Crackhead Craig. Speedball Bobby is insured by Allsnake Insurance Company with liability limits of $100,000. Crackhead is uninsured. Speedball was concerned that he may be sued for compensatory and punitive damages for entrusting his monster truck to Crackhead since Speedball was aware that Crackhead was a drug abuser. Speedball informs Allsnake that he did not give Crackhead permission to operate the truck. Allsnake decides to defend Crackhead Craig under a reservation of rights.

You make a policy limits demand for $100,000. Allsnake sends Eggshell Eddie to its medical expert, Dr. Richard Greenbacks. Dr. Greenbacks concludes that Eggshell Eddie’s herniated discs are all due to pre-existing cervical disc disease and were not caused by the subject accident. He opines that Eggshell needed only two weeks of physical therapy and all injuries caused by the subject accident should have resolved in four to six weeks. (Doesn’t this sound familiar?) Allsnake refuses to offer up its policy limits of $100,000. Crackhead hires Personal Counsel.

Personal Counsel approaches you and informs you that he believes that Allsnake has breached the implied covenant of good faith and fair dealing and he wants to enter into a settlement for a stipulated judgment for $300,000 with a covenant not to execute against Crackhead Craig. Crackhead and Speedball would assign their rights under the policy to your client so you can pursue the stipulated judgment against Allsnake. Should you accept Personal Counsel’s
proposal for a stipulated judgment?

General Rules Concerning Stipulations for Entry of Judgment

When an insurance carrier is providing a defense to its insured, the insured has no right to interfere with the insurer’s control of the defense. The insurance policy provides the insurance carrier with the right to control the defense and to settle the claims. The “no action” clause contained in most policies provides that no action may be brought against an insurer unless an insured’s obligation to pay an injured party has been determined by an actual trial or by the insurer’s consent. Therefore, any stipulated judgment between the insured and the injured claimant, without the consent of the insurer, is ineffective to impose liability on the insurer. Safeco Ins. Co. v. Superior Court (1999) 71 Cal.App.4th 782, 787. Any settlements reached without the consent or participation of the defending insurer which include a covenant not to execute or a similar device will be given no weight in a later action against the insurer under Insurance Code §11580. Since Allsnake was providing a defense and did not consent to the settlement, any settlement which provided for a stipulated judgment would be ineffective to impose any liability on Allsnake. If you accepted the offer from Personal Counsel, call your malpractice insurer.

Stipulated Judgment When Defense Denied or Withdrawn

Assume a different scenario. Assume for the moment that Allsnake disregarded Crackhead Craig’s statement that he was driving the monster truck with permission and refused to defend Crackhead Craig on the ground that Crackhead Craig was not a permissive user of the vehicle. Allsnake contends that since Crackhead did not have Speedball’s permission to operate the monster truck, Crackhead does not qualify as an insured covered by Allsnake’s policy. Assume also that Crackhead had liability insurance of $15,000 through Saturn Insurance. Your policy limits demand to accept the combined policy limits of $115,000 is agreeable to Saturn, but is rejected by Allsnake. Crackhead Craig retains Personal Counsel and he approaches you about a stipulation for entry of judgment with a covenant not to execute for the sum of $300,000. Would this judgment be enforceable under Insurance Code §11580? The answer is yes so long as you can establish Crackhead had permission to operate the truck or prove the permission issue was resolved in your favor in the underlying action.

A liability insurance carrier has a duty to defend its insured against third-party claims that are potentially within the scope of the insured’s policy. Furthermore, the insurer owes a duty to indemnify claims that are covered by the policy. California courts have derived an implied duty on the part of the insurer to accept a third party’s reasonable settlement demand on a covered claim in which the insured is facing potential liability in excess of the policy and the demand is within policy limits. This duty to settle arises from the duties to defend and indemnify contained in the insurance policy. An unreasonable refusal to settle may subject the insurer to liability for the entire amount of the judgment rendered against the insured, including any portion in excess of the policy limits. Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658; Safeco Ins. Co. v. Superior Court (1999) 71 Cal.App.4th 782, 787-788.

When the insurer denies its insured a defense for covered claims, the insured may make a reasonable non-collusive settlement with the third party, without the insurer’s consent. Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 728. When an insurer fails to provide a defense to its insured, the insured may assign its claims against the insurer to the third party in exchange for a covenant not to execute on the judgment. Ibid. The third party is entitled to then seek damages from the insurer for breach of the duties that the insurer owed to its insured in a separate action for breach of contract and breach of the implied covenant of good faith and fair dealing. Id. at 725, 728. The settlement of the stipulated judgment made by the insured constitutes presumptive evidence of the amount of the insured’s liability to the third party, as well as the damages that resulted from the breach of the duty to defend and indemnify by the insurance carrier. Id. at 728.

[A]n insured who has been abandoned by his or her insurer and elects to settle rather than risk an adverse judgment is entitled to an evidentiary presumption, in a subsequent action against the insurer to enforce policy provisions, as to the “insured’s liability on the underlying claim, and the amount of such liability.”

Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 527. Insurance Code §11580 allows an injured plaintiff to bring a direct action against the defendant’s insurance carrier when the carrier does not defend its insured once the plaintiff has obtained a judgment against the defendant. Travelers Casualty & Surety Co. v. Superior Court (2005) 126 Cal.App.4th 1131, 1141. When an insurer has breached its duty to defend under a policy, the insurer may be bound by a stipulated judgment agreed to by its insured without its consent, notwithstanding a “noaction” clause in the policy. Diamond Heights Homeowners Assn v. National American Ins. Co. (1991) 227 Cal.App.3d 563, 581. “The insurer is deemed to have waived its rights under the ‘no-action’ clause by such conduct constituting a breach of its obligations under the policy.” Diamond Heights, supra, at 581.

You accept Crackhead Craig’s agreement and enter judgment by stipulation against Crackhead Craig for the sum of $300,000 and receive an assignment of rights against Allsnake. Pursuant to the terms of the agreement, judgment is entered and you begin your direct action against Allsnake.

Allsnake raises the “no-action” clause as a defense. That is quickly disposed of since Allsnake did not provide a defense to Crackhead. In addition, Allsnake maintains that there are no damages for its refusal to defend Crackhead Craig even if it had an obligation to do so since Crackhead Craig was fully defended against all claims by Saturn Insurance Company. When more than one insurer has a duty to defend an insured, each insurance company’s duty is “separate and independent from the others . . . .” Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 70. Despite having multiple carriers that owed separate and independent duties to defend, “[a]n insured is entitled to only one full defense.” Safeco Ins. Co. of America v. Parks (2009) 170 Cal.App.4th 992, 1004. Consequently, an insurance company that has allegedly breached its duty to defend may establish that its insured suffered no damages from its alleged breach of its duty to defend by demonstrating that its insured received a full and complete defense, notwithstanding the breach. Emerald Bay Community Ass’n v. Golden Eagle Ins. Corp. (2005) 130 Cal.App.4th 1078, 1094. However, in cases in which the non-defending insurer’s failure to provide a defense resulted in an increase in the insured’s exposure to personal liability, the insured may demonstrate damages from an alleged breach of the duty to defend, notwithstanding the fact that another insurer assumed the costs of providing a defense. Wint v. Fidelity & Casualty Co. (1993) 9 Cal.3d 257, 263.

In this case, Allsnake had a potential for coverage of Crackhead Craig since Crackhead Craig maintained that Speedball Bobby had given him permission to operate the monster truck. Therefore, Allsnake was required to defend Crackhead Craig since there was a potential for coverage as a permissive user of the vehicle. Montrose Chem. Corp. v. Superior Ct. (1993) 6 Cal.4th 287,295. Furthermore, pursuant to the holding in Wint v. Fidelity & Casualty Co., supra, Crackhead may establish damages from Allsnakes’s failure to defend despite the fact that Crackhead was fully defended by another carrier (Saturn) since Saturn’s policy limits were small as compared to Allsnake’s. In this case, Allsnake had an insurance policy with liability limits almost seven times greater than the Saturn Insurance Company’s policy limits. Crackhead Craig had a much greater personal exposure as a result of Allsnake’s refusal to provide him with a defense. Since a defense was not provided, the stipulation for entry of judgment would most likely be upheld absent some fraud or collusion. The mere fact that Crackhead did not incur defense costs does not establish that he was not damaged. Ringler Associates, Inc. v. Maryland Casualty Co. (2000) 80 Cal.App.4th 1165, 1187. While the basic measure of damages for breach of the duty to defend is the cost incurred in defending the lawsuit “[there are] exceptions to this rule – as where the insured suffers liability in excess of the policy limits.” Id. Here, there was a potential for coverage under Allsnake’s policy which Allsnake breached by focusing only on the statement of Speedball and ignoring Crackhead’s statement that he had permission to drive the monster truck. Allsnake had an opportunity to settle within its policy limits and refused the policy limits demand. If the permissive user issue is deemed to have been decided in your favor in the underlying action or if Allsnake loses its coverage argument on the lack of permission issue in the subsequent trial, it will be liable for the entire stipulated judgment.

CONCLUSION

As plaintiff’s attorney, you want to be very careful when the defendant’s Personal Counsel approaches you with a proposal to enter into a settlement whereby a stipulated judgment would be entered and you would be assigned rights against the defendant’s insurance carrier in exchange for a covenant not to execute. As a general rule, if the carrier is defending, any agreement entered into without the defending insurer’s consent would be unenforceable against the insurance carrier in your subsequent direct action lawsuit under Insurance Code §11580 because of the “no action” clause. In effect, your client would have lost all rights to recover against that defendant, but would have the right to sue you for malpractice. If the defendant’s liability insurance carrier withdraws or denies a defense to its insured, you should consider the proposed settlement so long as you are able to resolve the coverage issue in the underlying claim or in the direct action in a manner to establish at least a part of the damages awarded were for a covered claim. This is an area that requires special handling in order to properly resolve the claims and maintain your right to collect the judgment against the insurance carrier under the stipulated judgment.


This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2012). To stipulate for entry of judgment or not to stipulate: That is the question. Trial Bar News, 35(7), 11-12,30-31.

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