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Kransco v. American Empire Surplus Lines Insurance Company6/22/2000
n favor of the insured for the full amount of the insured's damages, without reduction for the insured's comparative fault as allocated by the jury. (Code Civ. Proc., ยง 629.)
Both the insurer and insured appealed on a number of grounds. As relevant here, the insurer sought reinstatement of the jury's verdict allocating fault and liability for damages. The Court of Appeal affirmed the judgment in its entirety. For reasons to be explained, we conclude a liability insurer cannot assert the comparative bad faith of its insured in the underlying third party litigation as an affirmative defense in a bad faith action brought against it.
I. Facts
A. The Wisconsin Products Liability Litigation
In June 1987, 35-year-old Michael Hubert jumped headfirst onto his Wisconsin neighbor's backyard water slide toy known as a Slip 'N Slide and broke his neck, rendering him a partial quadriplegic. Hubert brought a personal injury action in Wisconsin against Kransco, the California corporation that manufactured the Slip 'N Slide toy.
Kransco tendered defense of the action to its Ohio-based primary liability carrier, American Empire Surplus Lines Insurance Company (AES), which had agreed to defend Kransco against personal injury actions in any state and indemnify it for all sums it became legally obligated to pay as damages up to $1 million, less Kransco's $100,000 self-insured retention. Kransco also had three layers of excess insurance above its AES primary insurance coverage: International Insurance Company (International) provided $2 million in excess of the $1 million primary coverage, Agricultural Excess and Surplus Insurance Company (Agricultural) provided the next layer of $1 million in excess of the $3 million, and Transco Syndicate No. 1 Ltd. (Transco) provided the last layer of excess insurance; $1 million in excess of the $4 million. In all, Kransco had $5 million in available liability coverage over and above its $100,000 self-insured retention.
During the discovery phase of the Hubert action, in response to an interrogatory by Hubert, Kransco denied knowledge of prior Slip 'N Slide accidents that had resulted in cervical injuries to adults. Kransco later amended its response to admit knowledge of two such accidents. One accident had resulted in the user's death, the other had left the user a quadriplegic and resulted in a $1.5 million settlement against the corporation from which Kransco had purchased the rights to manufacture the Slip 'N Slide. Kransco's amended response itself contained inaccurate information about the date of one of these accidents.
Hubert's action against Kransco was tried to a Wisconsin jury in April 1991. During the trial, Hubert offered to settle the action for $750,000, almost a million dollars less than his pretrial demand. Kransco approved settlement at that amount and tendered its $100,000 self-insured retention. Primary insurer AES, however, would contribute only $250,000 toward a settlement. AES rejected Hubert's $750,000 settlement offer and, given Kransco's willingness to contribute $100,000, and excess insurer International's willingness to contribute another $100,000, made a counteroffer of $450,000, which Hubert rejected. The jury ultimately returned verdicts awarding Hubert roughly $2.3 million in compensatory damages and $10 million in punitive damages.
In June 1991, while post verdict motions were pending in the Wisconsin trial court to reduce the unprecedented punitive damages award, Kransco settled with Hubert. Kransco and its insurers paid Hubert $7.5 million. Of this amount, AES contributed its policy limits of $900,000 while objecting to the settlement as unreasonable because i
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