21st Century Insurance Company v. Superior Court (Tapia) ____Cal.App.4th____; 14 C.D.O.S. 10271 (September 10, 2015)

A California appeals court held an insurance company that is defending its insured cannot be bound by a pre-trial stipulated judgment entered into by its insured without the insurer’s consent.

The insured, Cy Tapia, was a teenager living with his aunt and grandmother.Tapia was driving with Cory Driscoll in a vehicle owed by Tapia’s grandfather when he was involved in an accident. Driscoll was severely injured and eventually died from those injuries. Tapia had $100,000 in liability coverage under an automobile policy issued by defendant 21st Century Insurance Company that listed the vehicle as an insured vehicle and Tapia as the driver of the vehicle.

Prior to his death, Driscoll and his mother sued Tapia. 21st Century agreed to provide a defense to the suit. Plaintiffs thereafter rejected 21st Century’s settlement offer of the $100,000 policy limit since plaintiffs believed that Tapia might be covered under two additional 21st Century policies issued to Tapia’s aunt and grandmother, each providing $25,000 in coverage. Plaintiffs made an offer to settle for $150,000 which was not accepted within the time provided.

21st Century later offered $150,000 to settle the case against Tapia which plaintiffs declined. Plaintiffs then made a statutory offer to compromise pursuant to Code of Civil Procedure section 998 in the amount of $3 million for Driscoll and $1.15 million for his mother. 21st Century warned Tapia that it would not agree to be bound if Tapia accepted the offer. Tapia ignored this warning and agreed to the entry of a stipulated judgment for the amounts demanded by plaintiffs. 21st Century paid $150,000 plus interest to plaintiffs, and Tapia assigned any rights he had against 21st Century to plaintiffs.

Plaintiffs next filed a bad faith action against 21st Century. 21st Century moved for summary judgment which the trial court denied. This denial was reversed on appeal.

In reaching its decision, the Court of Appeal first cited Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 730 for the rule that “a defending insurer cannot be bound by a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment.” The Court noted that the crucial element in the Hamiltonruling was the lack of a judgment rendered after an adversarial trial given the potential for collusion. The Court stated that after trial, an insured could assign a bad faith claim in exchange for a covenant not to execute. The Court of Appeal also emphasized that if the situation involved an insurer that refused to defend, then the insured was free to enter into a stipulated judgment at any time.

The Court of Appeal rejected plaintiffs’ argument that 21st Century breached its duty to defend because it did not acknowledge coverage or a duty to defend under the policies issued to Tapia’s aunt and grandmother. The Court noted that 21st Century defended under the policy with the highest coverage, and even if 21st Century had a duty to defend under all policies, its partial breach of that duty could not have affected the defense offered.

The Court also found that the undisputed facts demonstrated that 21st Century did not have a duty to defend Tapia under either of the policies issued to his aunt or grandmother. The Court noted that the $100,000 policy specifically listed the vehicle driven by Tapia as an insured vehicle and Tapia as a “rated driver” of that vehicle. Neither the vehicle nor Tapia were listed on the other policies. The Court also found that the vehicle driven by Tapia could not be considered an insured vehicle under those other policies as those policies contained plain language that excluded coverage for vehicles “available for regular use” by household residents. The undisputed evidence demonstrated that Tapia had “regular use” of the vehicle.

The Court of Appeal directed the trial court to vacate its order denying 21st Century’s motion for summary judgment, and to enter a new order granting the motion.

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