Hamilton

A liability insurer agrees to defend its insured against a personal injury lawsuit. After the insurer refuses a settlement demand within the policy limits, the claimant and the insured, without the insurer’s participation, agree on a settlement. Under the settlement agreement, a stipulated judgment in excess of the policy limits is entered, the claimant agrees not to execute the judgment against the insured, and the insured assigns to the claimant the insured’s cause of action for breach of the insurer’s duty to accept a reasonable settlement demand. The trial court approves the settlement as made in good faith pursuant to Code of Civil Procedure section 877.6.

In a subsequent action by the claimant, as the insured’s assignee, against the insurer for breach of contract, is the amount of the stipulated judgment presumptively binding on the insurer as to the damages suffered by the insured as a result of the alleged contract breach? We conclude it is not; a defending insurer cannot be bound to a settlement to which it has not agreed and in which it has not participated, even where the settlement has been approved under Code of Civil Procedure section 877.6. In this…