When an insured has two policies through the same insurer, providing a defense under one policy does not insulate the insurer from liability for its alleged breach of the duty to defend and settle under a second policy. ( Risely v. Interinsurance Exchange of the Automobile Club (2010) 183 Cal.App.4th 196)
Facts
Sean Turner gave Lisa Risely a ride in his car and then allegedly began to drive erratically and negligently. Risely allegedly asked Turner to stop and to immediately take her home, but Turner refused. An accident occurred in which Risely suffered severe injuries. Risely sued Turner for motor vehicle negligence, negligence per se and false imprisonment.
At the time of the incident, Turner was insured under an automobile policy and a homeowners policy, both issued by the Interinsurance Exchange of the Automobile Club (Exchange). The automobile policy had limits of $50,000 but did not provide coverage for personal injury arising from false imprisonment. The homeowners policy had limits of $300,000 and did provide coverage for personal injury arising from false imprisonment.
The Exchange defended Turner under the automobile policy but did not defend him under the homeowners policy. The Exchange rejected an offer to settle the claim for $300,000 on the ground that it was in excess of the policy limits of the automobile policy and that there was no other applicable coverage.
Risely and Turner then stipulated to a judgment of $434,000 on Risely’s false imprisonment claim against Turner. As part of this arrangement, Risely received an assignment of all claims Turner might have against the Exchange. Risely then sued the Exchange for alleged bad faith arising from the Exchange’s refusal under the homeowners policy to defend and indemnify Turner against Risely’s false imprisonment claim.
The trial court granted summary judgment in favor of the Exchange and held that the Exchange could not be bound by Turner’s and Risely‘s agreement to settle. The trial court reasoned that because the Exchange provided Turner with a complete defense to Risely’s lawsuit under the automobile policy, it fulfilled its contractual obligation to provide a defense and the failure to defend under the homeowners policy was of “no consequence” to the insured, Turner. The trial court further held that when an insurer provides a complete defense to an insured, a settlement of an action by the insured without the consent of the insurer is insufficient to impose liability on the insurer in a later action against the insurer. Risely appealed.
Holding
The Court of Appeal reversed the summary judgment. According to the appellate court, “the mere fact that the insurer provided its insured with a defense under one policy does not necessarily insulate the insurer from liability for its alleged breach of the duty to defend and settle under a second policy.” The court reasoned that the Exchange’s refusal to defend Turner under the homeowners policy “… potentially increased the insured’s [Turner’s] exposure to personal liability.” Therefore, the Exchange had not established as a matter of law that Risely could not show damages.
Comment
Under Wint v. Fidelity & Casualty Co . (1973) 9 Cal. 3d 257, where a non-defending insurer’s failure to provide a defense potentially increases the insured’s exposure to personal liability, the insured can demonstrate damages from an alleged breach of the duty to defend, notwithstanding that another insurer assumed the costs of providing a defense. In the present case, the appellate court acknowledged that there is no reported decision dealing with a single insurer’s breach of its duty to defend under one of two policies. However, despite the fact that Wint dealt with two different insurers, the court in this case found no reason why the law should differ depending on whether the policies are issued by one insurer or multiple insurers.
Note that in this case, there has not yet been any determination regarding whether the homeowners policy actually covered Turner’s alleged liability to Risely. If the homeowners policy did not in fact cover Turner’s alleged liability to Risely, then presumably the Exchange would face no liability for failing to defend and settle under the homeowners policy.