Appeal from a judgment of the Superior Court of Los Angeles County, Warren L. Ettinger, Judge. Judgment is reversed and remanded with directions. (Los Angeles Count Super. Ct. No. MC016975).
The opinion of the court was delivered by: Croskey, J.
CERTIFIED FOR PUBLICATION
While this case presents a somewhat tortured procedural history, it also presents a significant question in the field of insurance litigation. When an insurer provides an insured a defense under a reservation of rights, and the insured subsequently reaches a private settlement with the third party claimant without the participation of the insurer, may the insurer intervene in the underlying action brought by the claimant to protect its own interests - including the right to seek a set-off of the judgment against the insured based on a prior settlement by the claimant with another party? We conclude that it may.
Plaintiff Steven Gray was injured in an automobile accident. The other driver was Dameon L. Begley, who was employed by Granite Construction Company (Granite). Gray brought suit against Granite and Begley for compensation for the injuries he had suffered in the accident. Granite was insured by Continental Casualty Company and Valley Forge Insurance Company (collectively CNA). Granite's excess insurer was Westchester Insurance Company (Westchester). CNA and Westchester reached an agreement with Gray on behalf of Granite, but not on behalf of Begley, whereby CNA and Westchester paid Gray an amount in excess of $8,000,000, in exchange for a release of Granite. Gray proceeded to trial against Begley and CNA defended Begley under a reservation of rights. Gray obtained a jury verdict, and judgment, against Begley for $4,500,000. Begley moved to vacate the judgment, in order to offset the amount of the settlement under Code of Civil Procedure section 877.*fn1
Thereafter, Gray and Begley reached a private agreement which required Begley to assign to Gray his rights against CNA and withdraw his motion to vacate the judgment. After Begley withdrew his motion to vacate, CNA moved to intervene, in order to proceed on its own motion to vacate the judgment and apply the setoff. The trial court granted the motion to intervene. However, due to Begley's withdrawal of his motion to vacate the judgment, the time within which a notice of appeal must be filed expired prior to the trial court hearing CNA's motion for setoff. On the last day, the trial court denied CNA's motion for setoff due to there not being sufficient time for it to be heard, and CNA filed a notice of appeal. On appeal, Gray argues that CNA should not have been entitled to intervene. We disagree. We also conclude that CNA is entitled to a hearing on its motion to vacate and for setoff. We therefore reverse and remand for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
We discuss, in some detail, the lengthy procedural history which ultimately deprived CNA of its right to be heard on its motion to vacate. While we do not address the merits of CNA's motion for setoff, or the merits of Begley's subsequently-filed bad faith action against CNA, the history of this matter raises questions regarding the possibility of collusion between Gray and Begley.
Gray was seriously injured in an automobile accident; he was a passenger in an SUV hit by Begley. Begley was allegedly driving a car entrusted to him by Granite, and acting within the course and scope of his employment. According to Gray, Begley was driving under the influence of alcohol, and recklessly crossed the lane-line, striking the SUV and causing it to roll over. Gray brought suit against Begley and Granite, alleging negligence on the part of both defendants. Gray also pleaded a cause of action for negligent entrustment against Granite, on the basis that Granite knew of Begley's prior reckless driving and should not have entrusted him with one of its vehicles. Gray sought compensatory and punitive damages against both defendants.
Initially, CNA denied coverage for Begley on the basis that Begley had been acting outside the course and scope of his employment when he drove drunk. Nonetheless, it offered to provide him with a courtesy defense. CNA apparently accepted the defense of Granite. There are unresolved factual disputes, not relevant to the issues raised by this appeal, regarding whether: (1) CNA timely notified Westchester of the possibility that Westchester's excess policy might be implicated; (2) CNA improperly declined a settlement offer within its policy limits; and (3) defense counsel appointed by CNA properly prepared for trial.
The case proceeded toward trial against Begley and Granite. Westchester became involved and entered into settlement negotiations with CNA and Gray. On April 25, 2008, Gray signed a release agreement. The release was signed only by Gray and his counsel; there are no signatures on behalf of CNA, Westchester, or Granite. Under the terms of the release, CNA was to pay Gray the remains of its policy limit,*fn2 in the amount of $3,186,380.62. Westchester was to pay an additional $5,000,000. In exchange for these payments,*fn3 Gray would dismiss and release Granite. The release clearly stated that it did not release Begley, nor would it release CNA. However, the release stated that Gray "has agreed to enter into a covenant not to execute with Begley upon entry of judgment."
Ultimately, Gray would argue that the language of the release which exempted Begley and CNA from its terms was intended to allow Gray to proceed to trial against Begley and attempt to collect any judgment against CNA with no offset for the amounts paid on behalf of Granite. In contrast, CNA would argue that although Begley and CNA were not expressly released by this agreement, the agreement did not preclude the offset provided for in Code of Civil Procedure section 877 from applying to any subsequent judgment obtained against Begley.
The other term of note from the release agreement is that Gray "has agreed to enter into a covenant not to execute with Begley upon entry of judgment." It would come to pass that Gray would not, in fact, enter into a covenant not to execute against Begley without receiving additional consideration.*fn4
Although Gray would eventually challenge CNA's evidence that CNA and Westchester paid the amounts indicated in the release, Gray dismissed, with prejudice, his complaint against Granite. A few weeks later, CNA withdrew its denial of coverage of Begley and instead agreed to defend him subject to a reservation of rights. The case proceeded to trial against Begley alone. Negligence was conceded; the issues at trial were causation and damages.
In that trial, the jury concluded that Begley's negligence was a substantial factor in causing harm to Gray. The jury was then asked, "What are [Gray's] total damages?" The jury concluded Gray suffered $3,500,000 in economic losses and $1,000,000 in non-economic losses, for a total verdict of $4,500,000. After the verdict was read, the trial court asked counsel, "Will there come a time or have you already determined how the court is to apportion the amount of the judgment where there has been a settlement as to a defendant, at least that's my understanding, and how is the judgment against defendants reduced and in what measure?" Begley's counsel, who was provided by CNA, argued that the entire settlement should be offset. Gray's counsel stated that the settlement with Granite "was only for the punitive exposures to Granite."*fn5 Gray's counsel was adamant that the settlement with Granite did not in any way encompass compensatory damages suffered by Gray, but settled only Gray's claim against Granite for punitive damages. The trial court therefore sought briefing on the issue of any setoff.
Gray submitted a proposed judgment in the amount of $4,500,000, plus costs and attorneys fees. Begley submitted a proposed judgment in the amount of zero dollars, on the basis that the entire judgment should be offset by the Granite settlement. No hearing on the issue of setoff was held. Instead, on August 29, 2008, the trial court signed the judgment submitted by Gray. Notice of entry of judgment was served on September 3, 2008.
On September 8, 2008, Begley moved ex parte to vacate the judgment under Code of Civil Procedure sections 663 and 473, subdivision (b). Begley took the position that entry of judgment without further briefing and a hearing on the issue of offset constituted either a trial court error or attorney mistake. Indeed, Begley submitted a declaration of counsel to the effect that counsel had already reserved a hearing date for the motion for reduction of the award, and had been propounding discovery relating to the settlement in preparation for such a motion.
At the hearing on the ex parte motion, the trial court concluded that the issue of whether the judgment should be vacated should proceed via noticed motion. At this point, Begley's counsel asked for an order shortening time so that Gray would not execute on the judgment and impair Begley's credit. At no point did either Begley or Gray argue that the release included a promise of a covenant not to execute against Begley. In any ...