Unpublished Disposition, 860 F.2d 1089 (9th Cir. 1983)

MEMORANDUM

National Union Fire Insurance Company and American International Group (National Union) appeal the district court's order granting partial summary judgment to the Bank of America (Bank) on the Bank's counterclaims for breach of National Union's common law and statutory duties to represent the Bank's interests in good faith. The district court certified its order for appeal pursuant to Fed. R. Civ. P. 54(b). We reverse.

We review the district court's entry of summary judgment de novo. Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir. 1986). Summary judgment is appropriate only where, after viewing the facts in the light most favorable to the nonmoving party, it clearly appears that no genuine issue of material fact remains for trial and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Ashton v. Cory, 780 F.2d 816, 818 (9th Cir. 1986). The moving party has the burden of establishing that there is no genuine issue of material fact. Avila v. Travelers Insurance Co., 651 F.2d 658, 660 (9th Cir. 1981). If the moving party meets this burden, the burden shifts to the opposing party to "set forth specific facts showing that there is a genuine issue for trial." Id., quoting Fed. R. Civ. P. 56(e). However, no defense to an inadequate showing is required. Neely v. St. Paul Fire & Marine Insurance Co., 584 F.2d 341, 344 (9th Cir. 1978). In this diversity jurisdiction case, California substantive law applies.

The district court determined that National Union breached its statutory and common law duties as an insurer by failing to respond reasonably promptly to the Phillips offer and by affirmatively misleading the Bank regarding its intention to defend the Bank in the Phillips matter. It based these determinations on the following: first, that National Union's statement that it had not had time to evaluate the Phillips claim "was false"; second, that National Union made "no effort to evaluate the Phillips' offer" but instead devoted the time available to it while the offer was pending "entirely to an analysis of the coverage question"; and finally, that National Union "knew virtually from the day it received the offer, that it would address it, if at all, only after reviewing the coverage question."

The Bank defends the district court's conclusions by arguing that they were "amply justified" by undisputed facts. It points out that National Union knew as early as August first that it had decided to seek advice on the coverage question, but that it did not inform the Bank of this fact until after the deadline expired; that it waited to inform the Bank of the offer until the day before the deadline; and that it did not inform the Bank of its intention to file a lawsuit for declaratory relief. The Bank's argument, however, misperceives our role as a court reviewing an order granting summary judgment. We do not inquire whether the district court's finding of bad faith can be "justified" by reference to evidence in the record, as we would if the district court had been sitting as the fact finder in this case. Rather, we may affirm the summary judgment only if we determine, after drawing all reasonable inferences in favor of National Union, that the undisputed facts establish National Union's liability as a matter of law.

The facts the district court found significant do not establish National Union's liability as a matter of law. Under California law, an insurance company that has undertaken defense of its insured must "take into account the interest of its insured and give it at least as much consideration as it does its own interest." Communale v. Traders & General Insurance Co., 50 Cal. 2d 654, 659 (1958). This duty of good faith and fair dealing is an implied covenant in every contract in California. Id. at 658. An insurance company's liability for a breach of its duty of good faith and fair dealing may be predicated on its unwarranted rejection of a reasonable settlement offer. See, e.g., Crisci v. Security Insurance Co., 66 Cal. 2d 425, 430 (1967); Miller v. Elite Insurance Co., 100 Cal. App. 3d 739, 759 (1980) (Miller) ; Critz v. Farmers Insurance Group, 230 Cal. App. 2d 788, 797 (1964) (Critz) . The question whether the insurance company has dealt in bad faith with its insured is a fact-sensitive one. Critz, 230 Cal. App. 2d at 796. Among the factors that the jury should consider are the strength of the claimant's case, failure of the insurer to inform the insured of a settlement offer, the amount of financial risk to which each party is exposed in the event of a refusal to settle, and "any other factors tending to establish or negate bad faith on the part of the insurer." Id.

In the present case, the parties disputed both the reasonableness of the $750,000 settlement offer and the reasons for the insurance company's delay in responding to the offer. For example, National Union, in opposition to the Bank's motion for summary judgment, pointed out that at the time it received the offer, it was in the process of deposing critical witnesses, that it had not yet received information it had requested regarding the Bank's potential defenses to the Phillips claim, that it appeared that Phillips had suffered little or no emotional or financial injury as a result of the Bank's conduct, that the Bank's policy limits did not appear to be threatened by the underlying action, and that the Bank itself, at a later date, offered less than $750,000 to settle the claim. Each of these facts is probative of the question whether National Union's failure to accept or respond to the offer until August fourth was "unwarranted" and whether the settlement offer itself was "reasonable." See Jackson v. State Farm Mutual Automobile Insurance Co., 148 Cal. App. 3d 1179, 1185-86 (1983) (question of insurer's state of mind in refusing to settle requires an examination of what facts the insurer had or should have had in its possession); Critz, 230 Cal. App. 2d at 796-97 (question of insurer's state of mind in rejecting offer turns on numerous factors). Viewing the facts, as we must, in the light most favorable to National Union, we must conclude that triable issues of fact remained regarding the reasons for National Union's rejection of and delay in responding to the $750,000 settlement offer.

Similarly, the fact that National Union was pursuing the coverage question at the same time the settlement offer was pending did not conclusively establish that its statement that it lacked sufficient time to evaluate the offer was "false" or that it was liable for a breach of its common law and statutory duties as a matter of law. Absent other facts, an insurer's efforts to determine the extent of its duties to its insured, including the filing of a declaratory relief action, cannot establish that the insurer has breached its duties of good faith and fair dealing to its insured. Atlas Assurance Co. v. McCombs Corp., 146 Cal. App. 3d 135, 150 (1983) (Atlas). Indeed, the insurer has a statutory right to seek such a declaration of its rights under the contract. Id. Thus, although an insurer may not abandon or otherwise prejudice its insured's interests while exploring coverage issues, see id.; see also Johansen v. California State Automobile Association Inter-Insurance Bureau, 15 Cal. 3d 9, 12-13 (1975), no case has been cited to us nor has our research uncovered authority for the proposition that " [a]ny disputes between the insured and the insurer ... over who should bear the loss should be resolved after the claimant has been paid and his claim extinguished." District court opinion at 13.

The district court assumed, both as a matter of fact and as a matter of law, that National Union could not simultaneously pursue the coverage question and defend the Bank's interests. See District court opinion at 13; id. at 15 ("the record indicates that National Union devoted the time entirely to an analysis of the coverage question") (emphasis added); id. at 17 (National Union's "efforts were directed to evaluating not the settlement offer itself, but rather the question of whether National Union would be liable for any judgment after a plaintiff's verdict at trial"); id. at 18 ("National Union needed the additional time to determine with greater certitude whether it could ultimately succeed in avoiding any liability at all"). This assumption was incorrect both as a matter of California law, see Atlas, 146 Cal. App. 3d at 150, and as a matter of federal summary judgment law, see Aronsen v. Crown Zellerbach, Inc., 662 F.2d 584, 591 (9th Cir. 1981) (On a motion for summary judgment, the trial court is not permitted to weigh the evidence, pass upon credibility, or speculate as to the ultimate findings of fact.), cert. denied, 459 U.S. 1200 (1983). National Union never conceded that it refused to consider the $750,000 offer on its merits or that its statement that it lacked time to evaluate the offer was false. Moreover, National Union presented evidence from which a jury could conclude that, during the period in which the $750,000 offer was pending, National Union had not breached its duty of good faith and fair dealing by abandoning or otherwise prejudicing the Bank's interests in favor of its own. We conclude, therefore, that the district court erred in granting summary judgment on the Bank's common law and statutory claims.

The Bank nevertheless contends that National Union's failure to notify the Bank during the pendency of the offer that it was pursuing the coverage question establishes National Union's liability as a matter of law. We disagree. First, the Bank cites no authority, and our research has not uncovered any cases, holding that an insurer's failure immediately to inform its insured that it has sought a coverage opinion and/or plans to initiate a declaratory relief action against its insured, standing alone, establishes a breach of its common law or statutory duties to its insured. As we have already stated, an insurance company's decision to pursue coverage questions is not necessarily inconsistent with its obligations to its insured. See Atlas, 146 Cal. App. 3d at 150. Thus, it would be improper at the summary judgment stage to infer from National Union's silence regarding its views of the coverage issue that it intended to delay its defense of the Bank until the coverage issue was settled. Second, National Union introduced evidence that it had in fact notified the Bank of potential coverage issues in its reservation of rights letter. Cf. Miller, 100 Cal. App. 3d at 757 (directed verdict proper where undisputed evidence established that insurance company had assumed defense without reserving its rights, had planned to deny coverage and refused to defend its insured, and had never informed the insured of its position or of a pending settlement offer). Viewing the evidence in the light most favorable to National Union, we cannot conclude that National Union intended to mislead the Bank regarding its pursuit of the coverage question.

In conclusion, our review of the record leads us to conclude that numerous issues remain for trial. Not only did the Bank fail to meet its burden of establishing the absence of material issues for trial, National Union demonstrated that numerous issues remained in dispute. The district court thus erred in granting summary judgment for the Bank. Therefore, we reverse the judgment and remand for trial.

REVERSED.

TANG, Circuit Judge, dissenting:

The majority finds, reviewing the evidence in the light most favorable to National Union, that "numerous issues" of material fact remain for trial. Viewing the same evidence, also in the light most favorable to National Union, I see no such issues and accordingly, would affirm the judgment of the trial court. The insurance company may well have had legitimate reasons for challenging the "reasonableness" of the settlement offer or for pursuing its own interests on the coverage question. These "issues," however, are not relevant to our inquiry on good faith. National Union could not, consonant with its common law and statutory duties of good faith and fair dealing, tardily respond to a settlement offer, whether reasonable or not, to the subsequent detriment of the Bank. Accordingly, I respectfully dissent.

The key fact, obscured by the majority, relates to the date and nature of the notice provided by National Union to its insured regarding its position on the settlement offer. The $750,000 settlement offer was extended July 19, 1983. On July 29, a deadline of August 5 for the acceptance of the offer was imposed. On August 2, the Bank released its $100,000 self-insured retention and asked that the case be settled immediately. National Union notified the Bank on August 4 that it "needed more time to evaluate the case" and therefore, that it "would make no response." District court opinion at 7. [SER 7]. This fact alone, which was central to the district court's decision, rendered summary judgment appropriate.

National Union notified the Bank one day prior to the expiration date, not that the offer was unacceptable or with a counter-offer for an alternate sum, but rather with the tardy and equivocal response that "more time" was needed to evaluate the case. Further, and perhaps most important, the lateness of the notice clearly prejudiced the Bank. National Union's failure properly to inform its insured of its position on the settlement offer deprived the Bank of the opportunity to consider the acceptance of the settlement offer itself. Indeed, the ultimate settlement of the claim for $2,700,000 where $750,000 had been offered, suggests the amount of financial risk to which the Bank was exposed by National Union's refusal to settle promptly.

I do not dispute the majority's position that an insurance company may legitimately explore the extent of its coverage liability, Atlas Assurance Co. v. McCombs Corp., 146 Cal. App. 3d 135, 150 (1983), or even that such an inquiry need not necessarily conflict with a proper defense of the Bank's interests. Here, however, it is undisputed that notice was given at a late date and consequently, that the Bank, to its detriment, was deprived of an opportunity to settle. Where an insurance company has undertaken a defense, albeit pursuant to a reservation of rights, it still has a duty to act in the best interests of its insured and indeed must give those interests "at least as much consideration as it does to its own interest." Communale v. Traders & General Ins. Co., 50 Cal. 2d 654, 659, 328 P.2d 198 (1958). National Union had an obligation either to accept the offer if reasonable, or to notify the Bank of its position on coverage so that the Bank could have accepted on its own. Johansen v. California State Automobile Assoc. Inter-Insurance Bureau, 15 Cal. 3d 9, 15-16, 123 Cal. Rptr. 288, 291 (1975) (implied covenant of good faith and fair dealing imposes a duty on the insurer to settle a claim against its insured within policy limits whenever there is a substantial likelihood of recovery in excess of those limits); Miller v. Elite Ins. Co., 100 Cal. App. 3d 739, 756, 161 Cal. Rptr. 322, 331-32 (1980) (covenant of good faith and fair dealing always a prominent issue during settlement phase; insurer must give informed consent to any offer of settlement and must advise the insured of the offer and the company's assessment of that offer). To the extent there was a dispute over coverage, it is clear such conflicts can and should be resolved after the settlement of the claim. Johansen, 15 Cal. 3d at 19, 123 Cal. Rptr. at 294. Thus, National Union's failure to respond reasonably promptly to the Phillips' settlement offer itself constituted a breach of its duties as an insurer to deal fairly and in good faith with its insured.

The judgment of the district court is supported by the undisputed facts regarding notice and by the protections afforded an insured under California law. Because National Union's uncontroverted actions indicate that it placed its own interests before those of its insured, and because its actions strike at the core of the covenant of good faith and fair dealing, I respectfully dissent.