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Another Attempt To Expand The Rights Of Third Parties Against Insurance Companies Fails

Since the landmark case Moradi-Shalal v. Fireman's Fund Insurance Company (1988) 46 Cal.3d 287, a third party claimant's "right" to seek "bad faith" damages against the opposing party's insurance company has been precluded in California. Recently, the Second District Court of Appeal refused to make an exception to the Moradi-Shalal rule and precluded a third party claimant from seeking bad faith damages directly against the opposing party's insurer, despite the fact that both the insured and the third party were covered by the same insurer.

Coleman, et al. v. Republic Indemnity Insurance Co. of California (2005) 132 Cal.App.4th 403, involved an automobile accident between the Colemans who were insured by Republic Insurance Company of California ("Republic") and Jesus Gonzalez who was insured by Infinity Insurance Company ("Infinity") which is the parent company of Republic. In response to the tender by Gonzalez, Infinity paid the Colemans' property damage claim. At the same time, Infinity forwarded correspondence to the Colemans setting forth when the statute of limitations would run on the Colemans' liability claim against Gonzalez. Prior to the expiration of the statute of limitations, the Colemans forwarded medical records and other materials to the Infinity adjuster. Infinity informed the Colemans that Infinity would process the claim and that the Colemans would not require an attorney.

Approximately one month after the expiration of the statute of limitations, the Colemans called the Infinity adjuster who apologized for the delay in processing the claim and stated that he was waiting for approval of the settlement from his supervisors. Approximately two weeks later, the Infinity adjuster's supervisor advised the Colemans that Infinity would not pay the Colemans' third party liability claim because the statute of limitations had run.

The Colemans brought suit against Infinity because the Colemans asserted that they were told by Infinity that the claim would be adjusted regardless of the statute of limitations and that Infinity's actions had caused the Colemans severe emotional distress. The Colemans suit included causes of action for intentional and negligent infliction of emotional distress and for breach of the implied covenant of good faith and fair dealing against both Infinity and Republic.

The seminal Moradi-Shalal decision was based upon public policy considerations including the recognition that allowing a third party claimant to bring actions against insurers would present an "adverse social and economic consequence" citing to increased insurance costs, a drain on judicial resources and the creation of an inherent conflict that would disrupt the ability of an insurer to settle and cause a disadvantage to its insured.

A primary contention of the Colemans was that Infinity owned more than ten percent of Republic and, as such, Republic and Infinity were corporate "alter egos" and should be treated as the same insurer based upon Insurance Code section 1215(b). Section 1215(b) states that there is control by one entity over another when one entity holds at least ten percent of the voting securities of any other entity. Thus, the Colemans argued that Republic and Infinity were essentially the same insurance company, and Infinity had just as much obligation to the Colemans as a Republic insured as Infinity, the actual insurer of the Colemans. Furthermore, the Colemans asserted that since they were in the dual roles of a third party claimant and insureds of Republic, an exception should be made to allow a third party claim against Republic because of Republic's duties to the Colemans as the Colemans' insurer.

The Court of Appeal, however, was unwilling to look at the Colemans as anything but a third party claimant regardless of the coincidence that the Colemans were also insureds of Republic. In order to establish liability for bad faith the insurer must be in a "relevant contractual relationship" with the insured. The mere fortuity that the Colemans were involved in a traffic accident with an insured of the same insurance company as the Colemans does not create a "relevant contractual relationship" to support a bad faith claim by a third party regardless of whether the Colemans also had an insurance contract with Republic. The Court of Appeal refused to allow Republic to be placed in the "untenable position of owing a duty of good faith to both the insured tortfeasor and his adversary." Thus, the Colemans' had no basis to sue Gonzalez' insurer for bad faith even though the Colemans' were insured by the same carrier.

As to the Colemans' intentional infliction of emotional distress cause of action, the Court of Appeal confirmed that Moradi-Shalal did not preclude third parties from bringing such common law actions against the other party's insurer. However, delay in claims handling or the denial of claims does not rise to a sufficient level of outrageous conduct which can support a cause of action for intentional infliction of emotional distress. Lee v. Travelers Cos. 205 Cal.App.3d 691 (1988). The Colemans' basis for this cause of action was that Republic misled the Colemans with respect to the statute of limitations and advised the Colemans not to retain an attorney. Such conduct was simply not within the parameters of outrageous conduct that would support the Colemans' intentional infliction of emotional distress claim.

Finally, the Colemans also attempted to bring a negligent infliction of emotional distress cause of action against Republic. Given that damages for negligent infliction of emotional distress necessarily must arise out of a special relationship or out of a duty owed to a party, and since the Court of Appeal held that Republic owed no duty to the Colemans as third party claimants, the Colemans' negligent infliction of emotional distress claim was similarly stricken.

In Coleman, the Second District Court of Appeal refused to create an exception and impose a duty on carriers to a third party claimant even if the insurer has a duty to the third party claimant as an insured under a separate policy. The Coleman case is an indication of the Court's unwillingness to infringe upon the well established principal that third parties cannot maintain bad faith claims against another party's insurer.

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