Opinion
Rehearing Granted Aug. 25, 1989.
Previously published at 212 Cal.App.3d 793
Wilcoxen & Callahan, Gary B. Callahan, Mary-Angela E. Devlin, and Susan A. Collier, Sacramento, for defendant and appellant.
McDonald, Saelter, Morris, Creeggan & Waddock, William O. Morris, and Richard W. Sherwood, Sacramento, for plaintiff and respondent.
SIMS, Acting Presiding Justice.
Appellant Steven Crane is the plaintiff in a pending personal-injury action. In this declaratory relief action, he appeals from the entry of summary judgment in favor of respondent State Farm Mutual Automobile Insurance Company, the insurer of defendants in the personal injury action. The trial court concluded State Farm was not liable for prejudgment interest pursuant to Civil Code section 3291 on any judgment which may ultimately be awarded against its insured. (All further undesignated code references are to the Civil Code.) We shall reverse the summary judgment.
FACTUAL AND PROCEDURAL BACKGROUND
On May 18, 1985, appellant was rendered paraplegic in an accident while riding as a passenger in a vehicle owned by Michael White and driven with Michael's permission by Donald White. Michael White carried an insurance policy issued by respondent State Farm covering the owner and permissive users of the vehicle. (See Ins.Code, § 11580.1, subd. (b)(4).) The policy limited liability for bodily injury for each person involved in an accident to $25,000. Other pertinent provisions of the policy are set forth in the margin.
"SECTION I--LIABILITY--COVERAGE A
On July 8, 1985, before any suit had been filed, respondent offered its policy limits of $25,000 to appellant "in full settlement" of appellant's claim. The offer was rejected.
On July 31, 1985, appellant filed a complaint for personal injury against Michael White, Donald White and other defendants. On the same date, appellant filed an offer to settle for the sum of $499,999.99, pursuant to Code of Civil Procedure section 998. The offer was subsequently served on Michael On September 12, 1986, respondent filed the instant action for declaratory relief, seeking a ruling that it would owe no prejudgment interest on any judgment which might be awarded against its insureds. It also offered to deposit its policy limits with the court pursuant to Code of Civil Procedure section 572.
In January 1987, appellant moved for summary judgment and/or summary adjudication of issues on the question of prejudgment interest. Respondent then filed its own motion for summary judgment.
The trial court granted respondent's motion, and appellant timely filed a notice of appeal from the summary judgment.
DISCUSSION
If appellant is entitled to prejudgment interest in this case, the entitlement is found in section 3291, which states in pertinent part:
"If the plaintiff makes an offer pursuant to Section 998 of the Code of Civil Procedure which the defendant does not accept prior to trial or within 30 days, whichever occurs first, and the plaintiff obtains a more favorable judgment, the judgment shall bear interest at the legal rate of 10 percent per annum calculated from the date of the plaintiff's first offer pursuant to Section 998 of the Code of Civil Procedure which is exceeded by the judgment, and interest shall accrue until the satisfaction of judgment."
The parties agree that respondent's obligation to pay prejudgment interest must be located in its insurance policy.
"The interpretation of an insurance policy, like any other contract, is a matter of law as to which a reviewing court must make its own independent determination. [Citations.]" (State Farm Fire & Casualty Co. v. Lewis (1987) 191 Cal.App.3d 960, 963, 236 Cal.Rptr. 807.)
"As a general rule, ambiguities and uncertainties in a policy of insurance are resolved in favor of the insured. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 269 [54 Cal.Rptr. 104, 419 P.2d 168].) An insurance policy is not rendered ambiguous or uncertain, however, because of a strained or grammatically incorrect reading of the policy's terms. (Atlas Assurance Co. v. McCombs Corp. (1983) 146 Cal.App.3d 135, 144 [194 Cal.Rptr. 66].) 'Although we construe all provisions, conditions, or exceptions that tend to limit liability strictly against the insurer [citation], strict construction does not mean strained construction. [Citations.] We may not, under the guise of strict construction, rewrite a policy to bind the insurer to a risk that it did not contemplate and for which it has not been paid.' [Safeco Ins. Co. v. Gilstrap (1983) 141 Cal.App.3d 524, 532-533 [190 Cal.Rptr. 425].) The words used in a policy of insurance are to be construed according to the plain meaning a layman would ordinarily attach to them, and the policy is to be construed as a whole, each clause helping to interpret the other. (McBride v. Farmers Ins. Group (1982) 130 Cal.App.3d 258, 260-261 [181 Cal.Rptr. 539, 42 A.L.R.4th 1139].)" (Ray v. Farmers Insurance Exchange (1988) 200 Cal.App.3d 1411, 1416, 246 Cal.Rptr. 593; see Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 912, 226 Cal.Rptr. 558, 718 P.2d 920.)
In short, an insurance contract is to be construed in a manner which gives meaning to all its provisions in a natural, reasonable, and practical manner, having reference to the risk and subject matter and to the purposes of the entire contract. (Barrett v. Farmers Ins. Group (1985) 174 Cal.App.3d 747, 750-751, 220 Cal.Rptr. 135.)
With these principles in mind, we shall examine the policy in this case. Of immediate concern is the following language: "In addition to the limits of liability, we will pay for an insured any costs listed below resulting from such accident.
"...
"2. Interest on all damages owed by an insured as the result of a judgment until we pay, offer or deposit in court the amount due under this coverage." Respondent argues it has no obligation to pay prejudgment interest under section 3291 because the law treats such interest as damages, not costs. Hence, respondent asserts the interest is not "costs" which respondent is obligated to pay "in addition to the limits of liability."
We agree that the law views section 3291 interest as a component of damages. Section 3291 is a part of article 2 of chapter 1, division 4 of the Civil Code, titled "Interest as Damages." The courts have construed the term interest in other sections within this article to mean an item of damages, not a cost apart from damages. (Lineman v. Schmid (1948) 32 Cal.2d 204, 209, 195 P.2d 408; Canavin v. Pacific Southwest Airlines (1983) 148 Cal.App.3d 512, 526, 196 Cal.Rptr. 82; Marine Terminals Corp. v. Paceco, Inc. (1983) 145 Cal.App.3d 991, 998, 193 Cal.Rptr. 687; Big Bear Properties, Inc. v. Gherman (1979) 95 Cal.App.3d 908, 912, 157 Cal.Rptr. 443.) In construing statutes we must seek to harmonize statutes relating to the same subject (California Mfrs. Assn. v. Public Utilities Com. (1979) 24 Cal.3d 836, 844, 157 Cal.Rptr. 676, 598 P.2d 836) and construe together statutes in pari materia. (People v. Caudillo (1978) 21 Cal.3d 562, 585, 146 Cal.Rptr. 859, 580 P.2d 274.) We see no basis upon which to treat section 3291 interest differently from other interest in the described article.
However, our conclusion that the law technically regards the interest as damages does not mean that a layperson reading the policy would reach the same conclusion. The policy language must be read as a layperson would read it, not as it might be analyzed by an attorney or insurance expert. (McBride v. Farmers Ins. Group (1982) 130 Cal.App.3d 258, 260-261, 181 Cal.Rptr. 539.)
Reading the policy as a whole, we think a layperson would expect section 3291 interest to be covered by the language obligating respondent to pay, in addition to the limits of liability, "Interest on all damages owed by an insured as the result of a judgment until we pay, offer or deposit in court the amount due under this coverage." After all, section 3291 interest meets the literal criteria of this policy language. The interest is calculated "on ... damages owed by an insured as the result of a judgment...." This language is the policy's only explicit reference to the payment of interest. If the language is ambiguous or uncertain, it must be interpreted in favor of the insured, since there is nothing unreasonable about the insured's proferred meaning. (See Producers Dairy Delivery Co. v. Sentry Ins. Co., supra, 41 Cal.3d at p. 912, 226 Cal.Rptr. 558, 718 P.2d 920.) We therefore conclude section 3291 interest is a "cost" within the meaning of the policy language obligating respondent for payment in addition to its policy limits for bodily injury.
Various out-of-state cases cited by respondent are distinguishable because they involve insurance policies with different language. Thus, the policies at issue in Nunez v. Nationwide Mut. Ins. Co. (Me.1984) 472 A.2d 1383 and Guin v. Ha (Alaska 1979) 591 P.2d 1281 contained no mention of interest at all. The policies at issue in Factory Mutual Liability Ins. Co. of Amer. v. Cooper (1970) 106 R.I. 632, 262 A.2d 370, Walker v. Walker (1967) 108 N.H. 341, 235 A.2d 520, and Laplant v. Aetna Casualty & Surety Co. (N.H.1966) 107 N.H. 183, 219 A.2d 283, limited the insurer's obligation to pay only such interest as "accrues" or is "accruing" after entry of judgment. Appellant concedes that such a clause limits an insurer's obligation to the payment of post -judgment interest.
Respondent next argues it had no obligation to pay interest because it had offered to pay its policy limits of $25,000 before plaintiff ever filed his lawsuit. The policy states in pertinent part that respondent is obligated to pay interest "until we ... offer ... the amount due under this coverage." (Emphasis added; see fn. 1, ante.)
Appellant contends respondent cannot rely on this limiting language. As best we understand the argument, appellant suggests that "this coverage" includes an obligation to pay interest. Appellant apparently Under section 3291, interest is calculated from the date of the plaintiff's first offer pursuant to section 998 of the Code of Civil Procedure. Here respondent offered its policy limits before appellant ever made its section 998 offer. Hence, respondent's offer of the policy limits was made when no section 3291 interest was conceivably due. Respondent had no obligation to pay amounts of interest not due. Thus, if respondent's offer of the policy limits was valid, it extinguished respondent's obligation to pay prejudgment interest, because the policy limits were the maximum then "due under this coverage." (See Farmers Alliance Mut. Ins. Co. v. Bethel (8th Cir.1987) 812 F.2d 412, 413.) This conclusion is in accord with the manifest intent of the policy provision, which is to allow the insurer to cut off its obligation to pay interest on a judgment by paying or offering to pay all of its contractual obligation. We have no doubt that a layperson would read the policy in this manner. A contrary view would leave the insurer without a means to protect itself from the payment of prejudgment interest even though it has paid its policy limits in good faith. That result cannot be reconciled with either the language of the policy or the reasonable expectations of an insured.
This leaves the question whether respondent's offer of July 8, 1985, was a valid offer of "the amount due under [the] coverage," sufficient to stop the section 3291 interest clock from running. We conclude respondent has not shown the offer was valid for this purpose.
As we have said, one purpose of the limiting policy language is to allow the insurer to pay its policy limits--to do all that it is obligated to do--and thereby avoid the unfair imposition of prejudgment interest.
Here, however, on July 8, respondent did not simply pay or offer to pay its $25,000 policy limits to appellant. Rather, its offer was conditioned upon the full settlement (i.e., extinguishment) of appellant's claim.
If respondent wished to avoid its contractual obligation to pay interest by offering to pay its policy limits, any condition attached to the offer had to be a reasonable one. An unreasonable condition would not satisfy the covenant of good faith and fair dealing, protecting an insured, that is implied in every contract of insurance. (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658, 328 P.2d 198; followed in Coleman v. Gulf Ins. Group (1986) 41 Cal.3d 782, 794, 226 Cal.Rptr. 90, 718 P.2d 77; see Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 295, 250 Cal.Rptr. 116, 758 P.2d 58.) Thus, for example, we think it obvious that respondent could not cut off its obligation to its insured to pay interest by placing its policy limits in a bag at the South Pole and by giving appellant two days to pick it up.
In the present context, the condition attached to the offer by respondent was full settlement of the litigation. We believe the attachment of this condition to the offer had to be reasonable and in good faith. (See Elrod v. Oregon Cummins Diesel, Inc. (1987) 195 Cal.App.3d 692, 699-700, 241 Cal.Rptr. 108.) In other words, considering all circumstances, there had to be a reasonable possibility the settlement offer would be accepted. An insurer cannot insulate itself from its obligation to pay interest by conditioning payment of the policy limits upon the settlement of the litigation when the insurer knows or should know the plaintiff could not reasonably accept the offer. That condition can insulate the insurer from paying its policy limits as effectively as putting the limits in a bag at the South Pole. Neither the purpose of the policy language nor public policy suggests an insurer should be able to shift to its insured its obligation to pay prejudgment interest by making a chimerical offer the plaintiff cannot accept. For Respondent makes a variety of arguments in opposition to this conclusion.
First, although respondent named appellant as a defendant in its declaratory relief action (in which its insureds appeared without an attorney), respondent now asserts appellant cannot assert the lack of good faith of the settlement offer.
In support of this argument respondent cites cases holding that, in the absence of an assignment from an insured, or a statute granting the remedy, an injured third party cannot sue an insurer for bad faith failure to settle. (See Moradi-Shalal v. Fireman's Fund Ins. Companies, supra, 46 Cal.3d at p. 295, 250 Cal.Rptr. 116, 758 P.2d 58; Coleman v. Gulf Ins. Group, supra, 41 Cal.3d at p. 795, 226 Cal.Rptr. 90, 718 P.2d 77; Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 942, 132 Cal.Rptr. 424, 553 P.2d 584; Zahn v. Canadian Indem. Co. (1976) 57 Cal.App.3d 509, 513, 129 Cal.Rptr. 286.)
Putting aside the question whether, by having named appellant as a party, respondent has waived or is estopped from complaining of appellant's participation in the lawsuit, the cited cases do not suggest appellant's participation is improper. Appellant has not brought an action for recovery of money based upon the implied covenant of good faith and fair dealing. Rather, appellant has accepted respondent's invitation to comment upon the proper meaning of policy language defining the extent of coverage. While the implied covenant is useful to that interpretation, the ultimate resolution of the dispute involves the meaning of specific policy language, i.e., respondent's obligation to pay prejudgment interest as affected by its "offer" of its policy limits. It has long been recognized that injured third parties are proper defendants in an insurer's action for declaratory relief to determine the scope of coverage under its policy. (See, e.g., General Ins. Co. of America v. Whitmore (1965) 235 Cal.App.2d 670, 674-675, 45 Cal.Rptr. 556.) Indeed, if a judgment had been entered in this action, and had respondent refused to pay prejudgment interest, appellant could litigate respondent's interpretation of the policy language in an action authorized by Insurance Code section 11580, subdivision (b)(2). (See Shapiro v. Republic Indemnity Co. of America (1959) 52 Cal.2d 437, 440, 341 P.2d 289.) We see no reason why an earlier adjudication, which could increase the prospects of settlement, should be unavailable. We therefore conclude appellant is a proper party and may raise any and all arguments bearing upon the proper interpretation of the policy.
Insurance Code section 11580, subdivision (b)(2) requires that the policy at issue in this case contain, "A provision that whenever judgment is secured against the insured or the executor or administrator of a deceased insured in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment."
Respondent next argues that Farmers Alliance Mut. Ins. Co. v. Bethel, supra, 812 F.2d 412 and Bent v. Bostwick (1986) 148 Mich.App. 184, 384 N.W.2d 124 countenance against our interpretation of the policy. Neither case is on point.
In Farmers Alliance, an insured was sued for wrongful death and several times during the litigation the insurer offered its policy limits of $30,000. After trial a judgment was entered against the insured for an amount in excess of $222,000. Some five weeks after entry of judgment the insurer offered to pay its $30,000 policy limits, apparently by depositing the sum in court and filing an interpleader action. (Farmers Alliance, supra, 812 F.2d at p. 413.) The insurer sought post-judgment interest for the five-week delay pursuant to a policy provision obligating the insurer to Farmers Alliance is unhelpful to respondent on this point because it contains no discussion of possible bad faith and in fact concludes the insurer's offers were in good faith. We cannot reach that conclusion on the record in this case.
In Bent v. Bostwick, supra, 384 N.W.2d 124 the court held that an insurer was relieved of any obligation to pay prejudgment interest where it tendered its policy limits in settlement before a lawsuit was filed. The case is inappositebecause it (a) fails to mention the applicable policy language and (b) contains no discussion of the good or bad faith of the offer.
Respondent next asserts our conclusion is wrong as a matter of policy. Respondent argues, "... the insurer would face an impossible task of going beyond the offer itself to show it is in good faith. If the court requires a disclosure of assets or other such evidence to prove that an offer is in good faith, the insurer is helpless to prove good faith." This complaint of helplessness has a hollow ring.
It is clear that good faith of the instant settlement offer, and whether it is in the insured's interest under the subject policy, depend in large part on whether the insured has or will have assets in addition to the policy limits that can be reached to satisfy a judgment. (See Schmid v. Superior Court (1988) 205 Cal.App.3d 1244, 253 Cal.Rptr. 137.) In the absence of such assets, a policy limits offer of settlement will usually be in good faith and will ordinarily be accepted by a prudent plaintiff, even if the policy limits are far less than damages, because the plaintiff will not want to spend additional resources on litigation that produces no practical economic gain. (Ibid.)
Conversely, if the insured defendant has assets subject to execution substantially in excess of the policy limits, and if liability substantially in excess of the limits is provable, a prudent plaintiff will not accept a policy limits settlement, because the plaintiff can maximize his or her economic gain by going to trial. Under the subject insurance policy, it is not in the interest of the latter insured defendant to have a policy limits settlement offer conveyed, because the practical effect of such an offer is merely to extinguish the insurer's obligation to pay interest without paying its policy limits.
We see no reason why the insurer should not have an obligation to explain the ramifications of such a settlement offer to its insured, since, "The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest. [Citation.]" Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 659, 328 P.2d 198.) We think that, having received such an explanation, insureds will realize disclosure of their assets to their insurer is necessary and appropriate. In any event, in the rare case in which an insured would refuse to disclose his or her assets to the insurer, under the subject policy the insurer can stop the running of prejudgment interest by depositing the policy limits in court. (See fn. 1, ante.)
We have no occasion to consider the effect of respondent's offer to deposit its policy limits in court, made in its declaratory relief complaint filed September 12, 1986. That offer was not asserted as a ground for summary judgment below.
Respondent also claims that "If the insured has assets, and if the claimant discovers this, the claimant might not accept the limits." This is not a realistic concern because plaintiffs' counsel will not settle cases involving damages substantially in excess of the policy limits without first Respondent next queries, "[W]hat if the sole reason the offer was not acceptable to the plaintiff was plaintiff's desire to hold the insurer liable for prejudgment interest greatly in excess of its policy limit?" The answer is that the plaintiff's refusal does not dictate the good or bad faith of the offer. Assuming for purposes of argument the insured had no assets nor any prospect of acquiring assets in excess of the policy limits, a policy limits offer would ordinarily be in good faith despite plaintiff's rejection. We agree with respondent that a plaintiff's desire to obtain prejudgment interest cannot convert a good faith offer into a bad faith one.
Respondent next contends it showed that the offer was made in good faith. Respondent asserts, "[I]t is hard to imagine any instance where a policy limits offer made within two months of the accident in exchange for protection for the insured would not be in good faith as to the insured." We have pointed out such an instance above, namely, where the offer has no reasonable prospect of acceptance and therefore enables the insurer to cut off its obligation to pay prejudgment interest without paying its policy limits. Such an offer results in detriment without benefit to the insured.
In fact, respondent made no showing on its motion for summary judgment that its June 8 offer to settle was reasonable and made in good faith. The record shows only that appellant was rendered a paraplegic in the accident in which he was a passenger, that appellant made an offer of nearly half a million dollars pursuant to section 998 of the Code of Civil Procedure, and that respondent's earlier offer to settle was in the amount of $25,000. The facial disparity between the likely damages from appellant's serious injuries and the amount of respondent's offer suggests, prima facie, that respondent's offer was not made in good faith. (See Tech-Bilt, Inc. v. Woodward-Clyde Associates (1985) 38 Cal.3d 488, 499, 213 Cal.Rptr. 256, 698 P.2d 159; Elrod v. Oregon Cummins Diesel, Inc., supra, 195 Cal.App.3d at pp. 697-698, 241 Cal.Rptr. 108.) If respondent's offer was, in fact, reasonable, it was respondent's burden to show it upon the motion for summary judgment. (Code Civ.Proc., § 437c, subd. (b); see Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1107, 252 Cal.Rptr. 122, 762 P.2d 46; Jones v. Los Angeles Community College Dist. (1988) 198 Cal.App.3d 794, 812-813, 244 Cal.Rptr. 37; see also Schmid v. Superior Court, supra, 205 Cal.App.3d 1244, 253 Cal.Rptr. 137.)
Respondent claims appellant should have the burden of demonstrating the bad faith of the settlement offer. Respondent argues that appellant should have the burden because one who contends a settlement has not been made in good faith has the burden of proof under proceedings to determine the good faith of the settlement. (Code Civ.Proc., § 877.6, subd. (d).) However, the burden of proof in subdivision (d) of Code of Civil Procedure section 877.6 is allocated so as to encourage the salutary policy of settlement. No similar policy underlies an insurer's claims for declaratory relief under its policy. We see no basis for altering the usual burden of proof which requires respondent to prove each fact the existence of which is essential to the claim respondent is asserting. (Evid.Code, § 500.)
Respondent had the burden of proving its policy limits offer was made in good faith. Since respondent did not do so, the summary judgment must be reversed.
DISPOSITION
The judgment is reversed. Appellant shall recover costs on appeal.
MARLER and DEEGAN , JJ., concur.
Assigned by the Chief Justice.
"You have this coverage if 'A' appears in the 'Coverages' space on the declarations page.
"We will:
"1. pay damages which an insured becomes legally liable to pay because of:
"a. bodily injury to others ... [p] caused by an accident resulting from the ownership, maintenance or use of your car; and
"2. defend any suit against an insured for such damages with attorneys hired and paid by us. We will not defend any suit after we have paid the applicable limit of our liability for the accident which is the basis of the lawsuit.
"In addition to the limits of liability, we will pay for an insured any costs below resulting from such accident.
"1. Court costs of any suit for damages.
"2. Interest on all damages owed by an insured as the result of a judgment until we pay, offer or deposit in court the amount due under this coverage." (Emphasis added, original emphasis deleted.)
Respondent also suggests it could not "prove" an insured's assets, possibly in an action for declaratory relief. Respondent overlooks the availability of the Civil Discovery Act of 1986. (Code Civ.Proc., § 2016 et seq.)