An Insurer's Defense Under One Policy Does Not Excuse Its Breach Under Another

Does an insurer's defense of its insured under one policy excuse its breach of the duty to defend under another? A California Court of Appeal recently concluded: Not if the insured is potentially liable for an amount in excess of the policy limits. Risely v. Interins. Exch. of the Auto. Club, 183 Cal. App. 4th 196 (2010).

In Risely, the insurer (Auto Club) issued its insured (Turner) two policies: (1) an automobile policy with a limit of $50,000; and (2) a homeowner's policy with a limit of $300,000. Turner was sued for false imprisonment, among other claims, after he refused to allow the plaintiff (Risely) out of his car. Turner tendered the defense of the action to Auto Club. Auto Club defended Turner under the auto policy, which did not cover claims for false imprisonment. But Auto Club denied coverage and refused to defend under the homeowner's policy, even though that policy expressly covered claims for false imprisonment.

Risely offered to settle for $300,000, within the limits of Turner's homeowner's policy. Auto Club rejected the settlement demand. Turner then agreed to entry of a stipulated judgment against him in the amount of $434,000 in exchange for a covenant not to execute from Risely. Turner assigned to Risely his claims for breach of contract and bad faith against Auto Club. Risely then sued Auto Club.

Auto Club moved for summary judgment, contending that it was not liable for the settlement because it did not consent to it. Auto Club did not dispute that it breached its duty to defend under the homeowner's policy and acknowledged that a non-defending insurer may be liable for a settlement, including a stipulated judgment, to which it did not consent. See Pruyn v. Agricultural Ins. Co., 36 Cal. App. 4th 500 515-516 (1995); Diamond Heights Homeowners Assn. v. Nat'l American Ins. Co., 227 Cal. App. 3d 563, 581 (1991). But Auto Club argued that Turner suffered no damages as a result its refusal to defend under the homeowner's policy because it had provided a full defense under the auto policy. Since its breach of the homeowner's policy "was of no consequence," its consent to the settlement was still required.

To support its argument that its consent to the settlement was required despite its breach, Auto Club relied on Hamilton v. Maryland Casualty Company, 27 Cal. 4th 718 (2002) and Ceresino v. Fire Insurance Exchange, 215 Cal. App. 3d 814 (1989). Hamilton held that an insured's settlement of the underlying case, without the...