An Insurer Can Potentially Be Liable to a Judgment Creditor for Bad Faith, Breach of Contract, and Punitive Damages for the Refusal to Pay an Arbitration Award That Was Issued Against the Insured and Confirmed by a State Court
Gelfand v. N. Am. Capacity Ins. Co., 2013 U.S. Dist. LEXIS 177070 (N.D. Cal. Dec. 17, 2013)
In Gelfand, the district court held that a judgment creditor could proceed with claims against a general liability insurer for bad faith, breach of contract, and punitive damages as a result of the insurer’s alleged failure to pay a covered arbitration award that was issued against its bankrupt insured and was later confirmed by a state court.
In this coverage dispute, the judgment creditor asserted several counts against the insurer, including claims for breach of contract and bad faith. The carrier moved for partial summary judgment on the bad faith and breach of contract claims based on the contention that it owed no duties to non-insureds. In its opposition to that motion, the judgment creditor relied on Hand v. Farmers Insurance Exchange, 23 Cal. App. 4th 1847 (1994), which held that an insurer could be liable to a judgment creditor under California Insurance Code section 11580 for an underlying judgment under certain limited circumstances. The insurer argued that Hand was not good law because it conflicts with the California Supreme Court’s decision in Murphy v. Allstate Insurance Co., 17 Cal. 3d 937 (1976), which held that a judgment creditor may not assert a cause of action against a carrier for breach of the duty to settle.
The district court denied the insurer’s motion for partial summary judgment. In distinguishing Murphy, the court noted that Murphy involved the duty to settle while the case before it involved the duty to indemnify. This distinction is relevant, according to the Gelfand court, because the duty to indemnify an insured for a judgment inures to the benefit of the judgment creditor while the duty to settle does not. The court also found that although Hand did not involve a breach of contract claim, such a claim was implicit within the Hand ruling and is also allowed pursuant to California Insurance Code section 11580.
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