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April 2010

Risely v. Interinsurance Exchange of the Automobile Club. ? Insurer's Agreement to Defend Under One Policy and Deny Under Another Violated the Duty to Defend

Insurer Violated the Duty to Defend by Defending Insured Under his Automobile Policy, but Denying to Defend Under His Homeowners Policy

(March 26, 2010) 183 Cal.App.4th 196, 10 C.D.O.S. 3834

Division One of the Fourth Appellate District reviewed a trial court's decision to grant summary judgment in favor of Interinsurance Exchange of the Automobile Club ("Auto Club") in a breach of contract action in which Lisa Risely ("Risely") sought to recover the proceeds of an insurance policy as a judgment creditor.

On or about August 6, 2003, Risely, accepted a ride from Sean Turner ("Turner").  Turner then proceeded to drive erratically and refuse Risely's repeated demands to let her out.  Risely suffered severe, debilitating injuries in an ensuing car crash.  Risely attributed her injuries to false imprisonment, and sued Turner for, inter alia, motor vehicle negligence, negligence per se, and false imprisonment.

Turner was insured under two policies issued by the Auto Club – a $50,000 auto policy and a $300,000 homeowners policy.  During the litigation, Risely offered to settle her claims against Turner for the policy limits of the homeowners policy.  In response, the Auto Club informed Turner that it declined coverage under the homeowners policy but that it would defend all claims (including false imprisonment) under the auto policy.  Thereafter, the Auto Club declined the $300,000 settlement demand as exceeding the auto policy's limits. 

Risely and Turner eventually entered into a stipulated judgment in the amount of $434,000.  As part of this judgment, Turner assigned his rights against the Auto Club to Risely.  Risely in turn brought a combined bad faith suit and Insurance Code §11580 action against the Auto Club.  The Auto Club brought a motion for summary judgment, claiming that because it defended Turner under the auto policy, it was not bound by the stipulated judgment entered by the trial court.

The trial court granted Auto Club's motion for summary judgment because, as a matter of law, the Auto Club's refusal to defend and indemnify its insured under the homeowners policy had not caused the insured any damage. The trial court concluded that the insurer's refusal to defend the claim under a homeowners policy was "of no consequence" to the insured because the insurer provided Turner with a defense under the separate auto policy.  The Court of Appeal reversed.

The Court of Appeal held that while an insurer who provides a full defense is not bound by a stipulated judgment and an Insurance Code §11580 action can be brought only when there is a final judgment against the insured to meet the "no action" clause requirements of the policy, the rules change where the insurer has breached the duty to defend.  If the insured is not fully protected, and can show damage, even if a defense has been provided, an action against the breaching insurer will lie.  The Court of Appeal noted that each separate insurance policy carries with it the duty to defend, and a defense under one policy does not constitute a defense under the other.  An insurer that breaches the duty to defend under a policy may be bound by a stipulated judgment agreed to by its insured without its consent, notwithstanding a "no action" clause in the policy.

The Court of Appeal reviewed case law standing for the proposition that a bad faith case will not lie if the insured is fully protected.  However, the Court of Appeal found that none of those cases abrogate the holding in the seminal case of Windt v. Fidelity & Casualty Co.  In Windt, the non-defending insurer's failure to provide a defense potentially increased the insured's exposure to personal liability.  In this case, the Court of Appeal found that by denying coverage on the $300,000 homeowners policy, the Auto Club significantly increased Turner's personal liability risk even though it had provided a defense under the auto policy.

The Court of Appeal did not address the question of whether the homeowners policy provided indemnity coverage for Risely's false imprisonment claim.  However, assuming the homeowners policy provided indemnity coverage, the Court noted that the Auto Club's decision to defend under the auto policy with lower limits exposed Turner to a greater potential for personal liability. 

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This opinion is not final.  It may be modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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Christopher R. Wagner