Commercial Union Assurance Companies v. Safeway Stores, Inc.
26 Cal. 3d 912, 610 P.2d 1038, 164 Cal. Rptr. 709 (1980)
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Rule of Law:
An insured party does not owe an implied duty of good faith and fair dealing to its excess liability insurance carrier to accept a settlement offer below the excess policy's threshold, even when there is a substantial probability of a judgment exceeding that threshold.
Facts:
- Safeway Stores, Incorporated (Safeway) had tiered liability insurance coverage: Travelers Insurance Company for the first $50,000, Safeway self-insured for liability between $50,000 and $100,000, and excess coverage from Commercial Union Assurance Companies and Mission Insurance Company (Commercial) for liability exceeding $100,000 up to $20 million.
- Hazel Callies brought an action against Safeway.
- As a result of the action brought by Callies, Commercial was required to pay $25,000 to discharge its liability under the excess insurance policy.
- Commercial alleged that Safeway and Travelers had an opportunity to settle Callies's case for $60,000, or possibly $50,000.
- Commercial further alleged that Safeway and Travelers knew or should have known there was a possible and probable liability in excess of $100,000.
- Commercial alleged that Safeway and Travelers had a duty to settle the claim for a sum less than $100,000 when they had an opportunity to do so.
Procedural Posture:
- Hazel Callies brought an action against Safeway in San Francisco Superior Court.
- In that action, Callies recovered a judgment for the sum of $125,000 against Safeway.
- Commercial Union Assurance Companies, as excess liability carrier, filed a complaint in San Francisco Superior Court against Safeway (its insured) and Travelers Insurance Company (Safeway's primary carrier) to recover the $25,000 it had paid.
- Commercial's complaint attempted to state two causes of action: one in negligence and one for breach of the duty of good faith and fair dealing.
- Safeway demurred to Commercial's complaint, arguing it failed to state a cause of action.
- The superior court sustained Safeway's demurrer, granting Commercial 20 days' leave to amend.
- Commercial failed to amend its complaint, and the complaint was dismissed as to Safeway.
- Commercial appealed the judgment of dismissal to the Court of Appeal, First Appellate District (Commercial as appellant, Safeway as appellee).
- The California Supreme Court granted a hearing to resolve a conflict between the Court of Appeal's opinion in this case and an earlier case, Transit Casualty Co. v. Spink Corp.
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Issue:
Does an insured owe an independent duty, stemming from the implied covenant of good faith and fair dealing, to its excess liability insurance carrier to accept a settlement offer below the excess policy's threshold when there is a substantial probability of liability in excess of that figure?
Opinions:
Majority - THE COURT.
No, an insured does not owe an implied duty to its excess carrier to accept a settlement offer below the excess policy's threshold. The court adopted the Court of Appeal's opinion, stating that while the implied covenant of good faith and fair dealing is reciprocal, its specific duties depend on the nature of the bargain and the legitimate expectations of the parties. The traditional duty to settle is imposed on an insurer to protect the insured from liability exceeding policy limits, and no such reciprocal expectation flows from an excess insurer to its insured. The purpose of excess insurance is to provide additional resources should the insured’s liability surpass a specified sum; the insured owes no duty to defend or indemnify the excess carrier. When an insured is self-insured for an amount below the excess coverage, they are gambling with their own money, and the excess carrier has no legitimate expectation that the insured will prioritize the carrier's financial interests in settlement decisions. The court distinguished cases involving an insured's unconscionable acts that subvert an insurer's legitimate expectations, such as prejudicing subrogation rights or colluding to maximize excess liability, from merely refusing a settlement offer. The court explicitly disapproved of Transit Casualty Co. v. Spink Corp. to the extent it held otherwise, concluding that if an excess carrier wishes to impose such a duty, it must be established by express language in the policy.
Concurring - Newman, J.
Justice Newman concurred with the court's opinion but suggested that the aims of California Rules of Court, rule 29(a)(1) would have been more effectively furthered had the court handled the matter by simply depublishing the conflicting Transit Casualty case, rather than directly disapproving of it.
Concurring - Bird, C. J.
Chief Justice Bird concurred with the substance of the opinion but respectfully dissented from the form of that opinion, referencing her earlier concurring and dissenting opinion in In re Perrone C.
Analysis:
This case is highly significant for clarifying the scope of the implied covenant of good faith and fair dealing in the context of multi-tiered insurance, particularly concerning the relationship between an insured and an excess carrier. It definitively states that while the covenant is reciprocal, an insured does not have an affirmative implied duty to protect an excess insurer's financial interests by accepting a settlement. This decision empowers insureds to make strategic settlement decisions concerning their self-insured retention without fear of liability to their excess carriers for merely declining a settlement offer. It also places the onus on excess carriers to explicitly define such settlement duties in their policies if they wish to impose them, rather than relying on implied obligations.
