EVELYN JESS, Plaintiff, Cross-defendant and Appellant, v. FAITH MARIE HERRMANN et al., Defendants, Cross-complainants and Appellants, 26 Cal. 3d 131

Opinion TOBRINER, J. Since the adoption of comparative negligence in Li v. Yellow Cab Co. (1975) 13 Cal.3d 804 [119 Cal.Rptr. 858, 532 P.2d 1226, 78 A.L.R.3d 393], our court has been called upon, in a succession of cases, to determine the effect of the Li decision upon a number of distinct legal doctrines. In the instant case, we address another important issue arising in the wake of Li, namely, the proper application of “setoff” principles in comparative negligence or comparative fault cases. In this case, plaintiff and defendant were both injured when their cars were involved in an automobile accident.

Each party sought damages from the other, claiming that the accident had been caused by the other’s negligence. The jury found both parties partially at fault for the accident and returned verdicts awarding each of the parties damages diminished in accordance with the principles established in Li. Neither party obtained a judgment reflecting the compensable damages which the jury had awarded, however, because the trial court—over the objection of both parties—set off the parties’ respective damages and entered a single net judgment in favor of the plaintiff, denying the defendant any recovery whatsoever.

Both plaintiff and defendant have appealed, asserting that in comparative fault cases the impact of the Li decision compels a fundamental alteration of traditional setoff principles. For the reasons discussed below, we have concluded that the judgment should be vacated and the case remanded to the trial court for further proceedings. As we shall explain, in a comparative fault setting the practical effect that a setoff rule has on opposing parties differs dramatically by reason of whether or not the affected parties are insured.

If neither party is insured, a mandatory setoff rule operates in the reasonable fashion contemplated by traditional setoff principles, eliminating an unproductive exchange of money between the adversary parties and protecting each party from the potential insolvency of the other. If, however, each of the parties—like most California drivers —carries adequate automobile insurance to cover the damages, then a mandatory setoff rule clearly operates inequitably.

The setoff produces results detrimental to the interests of both parties and accords the insurance companies of the parties a fortuitous windfall simply because each insured happens to have an independent claim against the person he has injured. Under these circumstances, we conclude that general principles of equity and common sense dictate that California courts not blind themselves to the realistic status of the parties vis-a-vis insurance.

In the present case the trial court invoked a mandatory setoff rule without considering the potentially inequitable effect of such setoff in light of the parties’ insurance coverage, apparently concluding that the existing statutory provisions dictated an automatic setoff without regard to the interests of the parties or to the equities of the situation.

As we shall point out, past California cases demonstrate that the trial court erred in interpreting the existing statutes as establishing an ironclad setoff rule that must invariably be applied notwithstanding the equities of the case or potential conflict with other state policies. Accordingly, we vacate the judgment and remand the matter to the trial court to permit the court to ascertain the parties’ actual insurance coverage and to render an appropriate judgment in light of such coverage. 1. The facts and proceedings below.

On May 3, 1973, plaintiff Evelyn Jess and defendant Faith Marie Herrmann were both injured in an automobile accident when their cars collided near the intersection of Victoria and Main Streets in Los Angeles County. Jess thereafter filed the instant action against Herrmann for damages sustained as a result of the accident, and Herrmann in turn filed a cross-complaint against Jess, seeking recovery for the damages which she had suffered.

At the conclusion of the trial, the jury, in its special findings on comparative negligence (BAJI No. 14.94), determined that both parties were partially responsible for . the accident, allocating 40 percent of the fault to plaintiff Jess and 60 percent to defendant Herrmann. The jury additionally found that Jess had suffered $100,000 in overall damages and that Herrmann had sustained $14,000 in damages.

Reducing each of the parties’ total damages by the amount of the party’s respective fault, the jury determined that Jess was entitled to recover $60,000 ($100,000 less (40 percent of $100,000)) and that Herrmann was entitled to recover $5,600 ($14,000 less (60 percent of $14,000)). The trial court, however, did not enter separate judgments in favor of each party in the amount of the recoverable damages ascertained by the jury. Instead, over the objection of both parties, the court offset the two awards and entered a single judgment in favor of Jess for $54,400, the difference between the awards.

Under the trial court judgment, Herrmann obtained no recovery whatsoever. Both Jess and Herrmann have appealed from the trial court judgment, each arguing that the trial court should not have set off the respective awards but instead should have entered separate judgments corresponding to the jury verdicts, i.e., a judgment in favor of Jess for $60,000 and a judgment in favor of Herrmann for $5,600.

A number of amici curiae, some appearing at the court’s request in order to assure adequate representation of all interests, take issue with the parties’ contention and urge that the trial court’s judgment be affirmed. As noted above, we have concluded that the judgment should be vacated and the case remanded to the trial court for further proceedings. 2. In a comparative fault setting, the appropriate application of setoff principles cannot be determined in the absence of a consideration of the parties’ insurance status.

Since the trial court applied a mandatory setoff rule without considering the parties’ actual insurance coverage, the judgment must be vacated and the case remanded to the trial court to permit such consideration. In setting off the respective jury verdicts and entering a single net judgment in favor of plaintiff, the trial court in this case ostensibly applied the setoff principles reflected in sections 431.70 and 666 of the Code of Civil Procedure.

Although both plaintiff and defendant suggest that these statutes—which were enacted well before this court’s adoption of comparative negligence in Li—are fundamentally in conflict with Li’s principles and should have no application in comparative fault cases whatsoever, we think that position overstates the potential difficulties presented by the application of traditional setoff rules in a post-Li setting. As we shall explain, the propriety of the application of traditional setoff principles in such cases depends upon the availability of insurance coverage.

In cases in which neither party in a comparative fault action is covered by liability insurance, no conflict arises between ordinary setoff rules and the maintenance of a fair comparative fault system, since in such circumstances a setoff procedure simply eliminates a superfluous exchange of money between the parties.

Thus, for example, if neither Jess nor Herrmann carried any automobile liability insurance and both were financially able to pay the judgment against them, the setoff procedure applied by the trial court in the present case would not affect either party’s net recovery, but would simply operate as an accounting mechanism to avoid a payment and repayment of the same funds from one party to another.

Without setoff, Jess would pay Herrmann $5,600 and Herrmann would return the $5,600 she had just received from Jess along with $54,400 of her own funds for a total of $60,000; a set-off procedure merely reduces the exchange to a single transaction in which Herrmann pays $54,400 to Jess. Moreover, in an uninsured setting a setoff rule may operate to preclude an unfair distribution of loss if one of the parties is totally insolvent or is unable to pay a portion of the judgment against him.

For example, if in the instant case, Herrmann is uninsured and insolvent, the traditional setoff rule would prevent Herrmann from first recovering $5,600 against Jess and thereafter defaulting on her larger $60,000 debt to Jess. (See Fleming, Report to the Joint Committee of the California Legislature on Tort Liability on the Problems Associated with American Motorcycle v. Superior Court (1979) 30 Hastings L.J. 1464, 1470.) Nothing in Li or its progeny suggests that an injured party should be denied the limited protection from an insolvent debtor that the traditional setoff rule affords.

Accordingly, we do not believe that Li dictates a total abandonment of traditional setoff rules in comparative fault cases in which neither party is insured. In cases in which the opposing claimants in a comparative fault action carry adequate liability insurance, however, the effect of a mandatory setoff rule differs completely, and the inequities which give rise to the present plaintiff’s and defendant’s objection to the trial court’s action become readily apparent. The facts of the instant case illustrate the problem.

If both Jess and Herrmann carry adequate automobile insurance, in the absence of a mandatory setoff rule Jess would receive $60,000 from defendant Herrmann’s insurer to partially compensate her for the serious injuries caused by Herrmann’s negligence, and Herrmann would receive $5,600 from Jess’ insurer to partially compensate her for the injuries suffered as a result of Jess’ negligence.

Under the setoff rule applied by the trial court, however—despite the fact that both Jess’ and Herrmann’s injuries, financial losses and insurance coverage remain in fact unchanged—Jess’ recovery from Herrmann’s insurer is reduced to $54,400 and Herrmann is denied any recovery whatsoever from Jess’ insurer. As these facts demonstrate, a mandatory setoff rule in the typical setting of insured tortfeasors does not serve as an innocuous accounting mechanism or as a beneficial safeguard against an adversary’s insolvency but rather operates radically to alter the parties’ ultimate financial positions.

Such a mandatory rule diminishes both injured parties’ actual recovery and accords both insurance companies a corresponding fortuitous windfall at their insureds’ expense. Indeed, in this context, application of a mandatory setoff rule produces the anomalous situation in which a liability insurer’s responsibility under its policy depends as much on the extent of the injury suffered by its own insured as on the amount of damages sustained by the person its insured has negligently injured. Such a result runs directly contrary to the main objective of this state’s financial responsibility law (see Veh.

Code, § 16000 et seq.), which is to assure “monetary protection to that ever changing and tragically large group of persons who. . .suffer grave injury through the negligent use of [the] highways by others.” (Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 434 [296 P.2d 801, 57 A.L.R.2d 914]; see, e.g., Simmons v. Civil Service Empl. Ins. Co. (1962) 57 Cal.2d 381, 385 [19 Cal.Rptr. 662, 369 P.2d 262]; Interinsurance Exchange v. Ohio Cas. Ins. Co. (1962) 58 Cal.2d 142, 153-154 [23 Cal.Rptr. 592, 373 P.2d 640]; Barrera v. State Farm Mut. Automobile Ins.

Co. (1969) 71 Cal.2d 659, 670-673 [79 Cal.Rptr. 106, 456 P.2d 674].) As Professor Fleming has recently explained, “The purpose of liability insurance is not only to protect the insured against the adverse impact of liability but to assure that the victim be actually compensated for his tort loss instead of having merely an empty claim against a judgment-proof defendant.... [T]o allow set-off between A’s and B’s liability insurers would thwart the latter function and confer an undeserved windfall on the insurers.” (Fleming, Report to the Joint Committee of the California Legislature on Tort Liability on the Problems Associated with American Motorcycle Association v.

Superior Court, supra, 30 Hastings L.J. 1464, 1470 (fn. omitted).) For these reasons, virtually all of the commentators who have analyzed this issue concur in Professor Fleming’s conclusion that “[t]he only sensible solution from the point of view of compensation and loss spreading is... to proscribe set-off under ‘pure’ comparative negligence law whenever the participants are insured.” (Fleming, Foreword: Comparative Negligence at Last—By Judicial Choice (1976) 64 Cal.L.Rev. 239, 247; see, e.g., Levy, Pure Comparative Negligence: Set-Offs, Multiple Defendants and Loss Distribution (1977) 11 U.S.F.L.Rev. 405, 413; George & Walkowiak, Blame and Reparation in Pure Comparative Negligence: The Multi-Party Action (1976) 8 Sw.U.L.Rev. 1, 28-29; Posner et al., Comparative Negligence in California: Some Legislative Solutions—Part III L.A.

Daily J. Rep. (Sept. 9, 1977) pp. 4, 6-9.) Several decisions of the Florida Supreme Court confirm the importance of considering the matter of insurance coverage in applying traditional setoff rules in comparative fault cases. In Hoffman v.

Jones (Fla. 1973) 280 So.2d 431, the seminal Florida comparative negligence decision relied on by our own court in Li (see 13 Cal.3d at pp. 812, 826-827), the Florida Supreme Court initially indicated that general principles of setoff should be applied in a comparative negligence setting. (280 So.2d at p. 439.) The Hoffman case, however, did not involve the question of insurance coverage and the court consequently had no occasion to consider the effect that a general setoff rule would have with respect to insurance.

Several years later, the Florida court addressed the setoff issue again, this time in a case in which the potential effect of a setoff rule on insurance coverage was directly presented. In Stuyvesant Ins. Co. v.

Bournazian (Fla. 1977) 342 So.2d 471, the court concluded that while a setoff rule could properly be applied “between injured parties liable to each other in order to avoid an unnecessary exchange of checks and the possibility of inequitable judgment executions,” the setoff concept “should have no effect on the contractual obligation of liability insurance carriers to pay the amounts for which their insureds are legally responsible.” (Id., at p. 473.) Although the insurer in Stuyyesant, like the numerous amici in the instant case, argued that its obligation under its insurance policy should be viewed only as an obligation to pay sums owed by its insured after the setoff of any debts which the injured party owed its insured, the Florida court emphatically rejected that suggestion.

The court recognized that in securing insurance coverage an insured does not thereby authorize its insurance company to reduce its own liability by, in effect, appropriating to its own benefit a separate asset of the insured, i.e., the insured’s right to recover for his own injuries. (Id.,, at pp. 473-474 & fn. 5.) The Florida court stated in this regard: “Nothing in Hoffman, the insurance laws, or the public policy of this state justifies our reading into a standard automobile liability insurance contract a requirement that a partially-negligent but fully-insured person should absorb a portion of the cost of his negligence.

The purpose of the contract is precisely to the contrary, being designed and paid for to relieve the insured of all such obligations (within policy limits and over agreed deductibles, of course.)” (Id., at p. 474.) Accordingly, the Stuyvesant court concluded that “the concept of ‘set ofF... as announced in Hoffman applies only between uninsured parties to a negligence action, or to insured parties to the extent that insurance does not cover their mutual liabilities.

The doctrine has no effect on the contractual obligation of liability insurance carriers.” (Id.) Various amici in the instant case proffer a number of criticisms of the general rule adopted in the Stuyvesant case, asserting that at least under some circumstances the rule may afford an unfair advantage to uninsured motorists over insured motorists. We need not decide at this juncture, however, whether the “Stuyvesant rule” should necessarily be applied under all circumstances in California comparative fault cases.

At least in cases in which both parties to a lawsuit carry adequate insurance to cover the damages found to be payable to an injured party, both the public policy of California’s financial responsibility law and considerations of fairness clearly support a rule barring a setoff of one party’s recovery against the other.

Because the trial court in the instant case set off the parties’ respective judgments without considering the status of the parties’ insurance coverage, we conclude that equitable considerations would best be served by remanding the matter to the trial court so that it may ascertain the parties’ actual insurance coverage and thereafter resolve the setoff issue with full knowledge of such coverage.

Of course, even if equitable considerations are furthered by a setoff rule which takes cognizance of the parties’ actual insurance coverage, the question remains whether current California statutes preclude a trial court from taking into account such considerations in the setoff context. Amici argue that the governing statutes establish an inflexible and automatic setoff rule, which compels a trial court to set off “competing” judgments in all cases, even when both parties oppose such a setoff and when a setoff may conflict with the public policy reflected in the state’s financial responsibility law.

We have found nothing in the numerous cases applying the relevant statutory provisions or their predecessors which warrants such a reading of the statutes. As our court noted in Kruger v.

Wells Fargo Bank (1974) 11 Cal.3d 352, 362 [113 Cal.Rptr. 449, 5.21 P.2d 441, 65 A.L.R.3d 1266], California’s current statutory setoff provisions emanate from “the established principle in equity that either party to a transaction involving mutual debts and credits can strike a balance, holding himself owing or entitled only to the net difference.... ” (Italics added.) In light of this equitable origin, numerous California decisions have recognized that “the... right to setoff is not absolute, but may be restricted by judicial limitations imposed to uphold [independent] state policy.” (Id., at pp. 367-368 & cases cited at fn. 24.) Moreover, past California decisions have additionally made it clear that under appropriate circumstances a party may waive the statutory right of setoff, (See, e.g., Franck v.

J.J. Sugarman-Rudolph Co. (1952) 40 Cal.2d 81, 90 [251 P.2d 949]; Reveal v.

Stell (1922) 56 Cal.App. 463, 466 [205 P. 875].) Amici have cited no case in which the statutory provisions have been interpreted to compel a trial court to set off corresponding judgments over the express objections of both parties. (See generally Comment, Automatic Extinction of Cross-Demands: Compensate from Rome to California (1965) 53 Cal.L.Rev. 224; 274-275 (“one who is entitled to compensatio may waive his right to it; under the analysis presented here, automatic extinction of cross-demands is not forced on a party against his will.”) Under these circumstances, we conclude that the current setoff statutes cannot properly be interpreted to require setoff in cases in which such a setoff will defeat the principal purpose of California’s financial responsibility law and will provide an inequitable windfall to an insurance carrier at the expense of the carrier’s insured.

Accordingly, we conclude that the trial court in the present case erred in setting off the parties’ respective judgments and entering a single net judgment without considering the parties’ insurance status and the effect that such a setoff would have on the parties’ ultimate financial recovery. Insofar as it relates to defendant Richard Herrmann the appeal is dismissed. The judgment is vacated and the case is remanded to the trial court for further proceedings consistent with the views expressed in this opinion. The parties shall bear their own costs on appeal. Bird, C. J., Mosk, J., and Newman, J., concurred.

See American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578 [146 Cal.Rptr. 182, 578 P.2d 899] (joint and several liability, contribution and indemnity between negligent tortfeasors); Daly v. General Motors Corp. (1978) 20 Cal.3d 725 [144 Cal.Rptr. 380, 575 P.2d 1162] (products liability); Safeway Stores, Inc. v. Nest-Kart (1978) 21 Cal.3d 322 [146 Cal.Rptr. 550, 579 P.2d 441] (contribution and indemnity between negligent and strictly liable tortfeasors); Associated Construction & Engineering Co. v. Workers' Comp.

Appeals Bd. (1978) 22 Cal.3d 829 [150 Cal.Rptr. 888, 587 P.2d 684] (employer subrogation rights under workers’ compensation law). Although the Herrmann notice of appeal names Richard Herrmann as well as Faith Marie Herrmann as an appealing defendant and cross-complainant, no claim of error is urged in his behalf. Accordingly, we must dismiss the appeal as it relates to him. Other than to do so in our dispositive order, we make no further mention of him in this opinion.

Section 431.70 provides: “Where cross-demands for money have existed between persons at any point in time when neither demand was barred by the statute of limitations, and an action is thereafter commenced by one such person, the other person may assert in his answer the defense of payment in that the two demands are compensated so far as they equal each other, notwithstanding that an independent action asserting his claim would at the time of filing his answer be barred by the statute of limitations. If the cross-demand would otherwise be barred by the statute of limitations, the relief accorded under this

section shall not exceed the value of the relief granted to the other party. The defense provided by this

section is not available if the cross-demand is barred for failure to assert it in a prior action under

Section 426.30. Neither person can be deprived of the benefits of this

section by the assignment or death of the other.”

Section 666 provides: “If a claim asserted in a cross-complaint is established at the trial and the amount so established exceeds the demand established' by the party against whom the cross-complaint is asserted, judgment for the party asserting the cross-complaint must be given for the excess; or if it appears that the party asserting the cross-complaint is entitled to any other affirmative relief, judgment must be given accordingly. “When the amount found due to either party exceeds the sum for which the court is authorized to enter judgment, such party may remit the excess, and judgment may be rendered for the residue.” Although pre-Li cases frequently spoke of the purpose of the financial responsibility law in terms of providing compensation “for those injured through no fault of their own” (e.g., Interinsurance Exchange v.

Ohio Cas. Ins. Co., supra, 58 Cal.2d at p. 154), it is clear that in light of Li the purpose of the statutes must be more broadly defined as seeking to assure that monetary compensation is available for all injured parties who are entitled to recover damages as the result of another person’s negligent use of the highways. Amici contend that when one party is insured and the other party is uninsured, a no-setoff rule operates unfairly because it permits the uninsured party to recover from the insured party’s insurer, while the insured party may be unable to collect if the uninsured party is insolvent.

Under the mandatory setoff rule advocated by amici, however, an insured party certainly has no greater ability to recover for his injuries if his adversary is uninsured and insolvent. We have some question whether a no-setoff rule is necessarily “unfair” simply because it permits an uninsured and insolvent party, who has in fact suffered real injury as a result of another party’s negligence, to recover from an insurance company which has in fact been paid premiums to provide insurance for just such a situation.

Moreover, in many cases an insured party will benefit from a no-setoff, as opposed to a setoff, rule even if the other negligent party is uninsured and insolvent. In that situation the insured will frequently be able to obtain at least some recovery by levy and execution on the sums which its insurer pays to the uninsured party. In addition, if, like most insured drivers in California, the insured party has not deleted uninsured motorist coverage from his automobile insurance policy (see Ins.

Code, § 11580.2, subd. (a)), an insured driver may frequently benefit from a no-setoff rule because his recovery under the uninsured motorist provision will not be reduced by setoff principles. The draftsmen of the Uniform Comparative Fault Act have fashioned a setoff provision which attempts to meet the problems ostensibly arising in the context of insured and uninsured drivers.

Section 3 of the uniform act adopts a general setoff rule, but affords an insured a right to recover from his own insurance company the amount which the insurance company’s liability has been reduced by reason of the setoff. (12 West’s U. Laws Ann. (1979 Supp.) Civ. Proc. & Remedial L.U. Comparative Fault Act, § 3, p. 31.) Like a no-setoff rule, this procedure ensures that an insurance carrier will not reap a windfall benefit at the expense of its own insured’s recovery.

In addition, however, the provision operates to favor an insured tortfeasor (and to some extent his insurer) at the expense of an uninsured tortfeasor, transforming the insured’s liability insurance into first-party “uninsured motorist” coverage, and precluding an injured party who happens to be uninsured from recovering any damages which are subject to setoff. Such a provision does have the arguably beneficial effect of rewarding motorists who carry adequate liability insurance.

To the extent that the insured’s injuries would in any event be compensated by existing uninsured motorist coverage, however, the provision operates simply to reduce the insurance company’s liability to the injured uninsured party without providing any additional benefits to the insured. This result presumably conflicts with the compensation objectives of California’s financial responsibility law. As we explain in text, we have no occasion at this stage of the proceeding to determine the appropriate equitable setoff rule that should control under differing hypothetical circumstances.

Because the trial court in this case applied a mandatory setoff rule over the objection of both parties and without any consideration of the parties’ actual insurance coverage, we conclude that the judgment should be vacated and remanded for further proceedings. The designated record on appeal does not indicate whether either or both parties were in fact insured at the time of the accident, or, if insured, what insurance coverage each party actually possessed.

The absence of this information in the record is not surprising, however, since California does not presently afford an injured person a right directly to sue an insurance company which may be liable for the injury (cf. Ins. Code, § 11580, subd. (b)(2)) and since Evidence Code

section 1155 specifically precludes the introduction of evidence of liability insurance “to prove negligence or other wrongdoing.” Given this state of the law, we do not think it would be appropriate to rely on the absence of evidence of insurance in the present record as a basis for barring the parties from obtaining relief from a possibly inequitable setoff, particularly since one or both of the parties may well have been represented at trial by counsel provided by their insurers. We note that in briefs filed on appeal both plaintiff and defendant have stated that each of the parties did in fact possess liability insurance which covered the accident in question.