California Appeals Court Rules that Defending Insurer Is Not Bound by Stipulated Judgment to Which It Did Not Consent

In 21st Century Insurance Company v. Superior Court (Tapia), a California appeals court held that an insurance company that is defending its insured cannot be bound by a stipulated judgment entered into by its insured without a trial and judgment after verdict.

The insured, Cy Tapia, was a teenager living with his aunt and grandmother. Tapia was driving with Cory Driscoll in a vehicle owned by Tapia’s grandfather when he was involved in an accident that left Driscoll severely injured. Tapia had $100,000 in liability coverage under an automobile insurance policy issued by defendant 21^st Century Insurance Company.

Driscoll and his mother sued Tapia. 21^st Century agreed to provide a defense to this suit. Plaintiffs rejected 21^st Century’s settlement offer of the $100,000 policy limit as they believed that Tapia might be covered under 21^st Century policies issued to Tapia’s aunt and grandmother, each providing $25,000 in coverage.

21^st Century offered $150,000 to settle the case against Tapia which plaintiffs declined as they demanded $3 million for Driscoll and $1.15 million for his mother. 21^st Century warned Tapia that it would not agree to be bound if Tapia accepted the offer. Tapia ignored this warning, agreed to the entry of a stipulated judgment and assigned any rights he had against 21^st Century. Plaintiffs filed a bad faith action against 21^st Century, and 21^st Century moved for summary judgment which was denied. This denial was reversed on appeal.

The Court of Appeal cited Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4^th 718, 730 for the rule that “a defending insurer cannot be bound be a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment.” The crucial element in the Hamilton ruling was the lack of a judgment rendered after an adversarial trial given the potential for collusion. The Court stated that if the situation involved an insurer that refused to defend, then the insured was free to enter into a stipulated judgment at any time.

The Court of Appeal rejected plaintiffs’ arguments that 21^st Century breached its duty to defend because it did not acknowledge coverage or a duty to defend under the policies issued to Tapia’s aunt and grandmother.  The Court also found that the undisputed evidence demonstrated that 21^st Century did not have a duty to defend Tapia under either of the policies issued to his aunt or grandmother.