Summary
finding insufficient evidence of bad faith where insurer consistently followed the advice of its “agents and legal counsel”
Summary of this case from Bamford, Inc. v. Regent Ins. Co.Opinion
No. 35195.
Filed November 30, 1962.
1. Insurance. The liability of an insurer to pay in excess of the limits of the insurance policy accrues when the insurer, having the exclusive control of settlement, in bad faith refuses to compromise a claim for an amount within policy limits. 2. ___. When an insurer has the exclusive right to settle a claim within the limits of its liability, it has an option to compromise but no contractual obligation to do so. 3. ___. The amount of liability fixed by an insurance policy and upon which the premium is paid determines the limit of the contractual liability and duty of the insurer. 4. ___. An insurer may settle a claim within the limit of its liability as it chooses since the insured cannot be prejudiced by a settlement to be paid by the insurer. 5. ___. An insurance company is not required to waive its defense of nonliability which is made in good faith to avoid being held for a judgment in excess of the limits of its insurance policy. 6. ___. An insurance company cannot be held for the payment of a liability in excess of policy limits merely because its determination, arrived at in good faith, proved to be erroneous in the light of subsequent events. 7. ___. The right of an insurer to control the litigation in all of its aspects carries with it the duty to exercise diligence, intelligence, good faith, and conscientious fidelity in the interests of the parties. 8. ___. Where an insurer has exercised good faith in declining a settlement which has been fully and fairly considered, based on an honest belief that insurer could defeat the action or keep any possible judgment within policy limits, and its conclusions are based on a fair review of the evidence after reasonable diligence in ascertaining the facts, accompanied by legal advice with reference thereto, no liability over policy limits exists even if it is ultimately determined that its determination was a mistaken one.
Appeal from the district court for Dixon County: JOHN E. NEWTON, Judge. Reversed and remanded with directions.
Lyle C. Holland and Healey Healey, for appellant.
Harry N. Larson, Wear, Boland, Mullin Walsh, and A. Lee Bloomingdale, Jr., for appellee.
Heard before SIMMONS, C. J., CARTER, MESSMORE, YEAGER, SPENCER, BOSLAUGH, and BROWER, JJ.
This is an action by plaintiff, individually and as assignee of Thomas Shellington, against the defendant insurance company because of the refusal of the latter to settle the claims of plaintiff against Thomas Shellington within the limits of an automobile insurance policy issued by the insurance company to E. C. Shellington, Thomas Shellington being an additional insured under the provisions of the insurance policy.
The automobile accident giving rise to the present litigation occurred on June 29, 1952. At about 11:30 p.m. of that day Thomas Shellington, then 17 years of age, was driving his father's automobile from Wayne to Wakefield, in Wayne County, Nebraska, accompanied by four other members of the Wakefield Junior American Legion baseball team. Merlin Olson was one of the four guests riding in the Shellington automobile. At a point 2 miles south and 2 miles west of Wakefield an accident occurred on a bridge which had been constructed on an angle with the highway. There was a curve in the highway immediately west of the bridge. The road was level for 50 rods west of the bridge. The bridge was difficult to see until one approached close to it. The railings on the bridge were unpainted, badly rusted, and dark in color. There was nothing to warn an approaching traveler from the west of the position of the bridge with reference to the road. It was a dark night. The automobile approached the bridge at a speed of 45 to 50 miles an hour on the right side of the road with its headlights on the bright beam. The driver did not see the bridge until he was about 25 feet from it. The automobile struck the bridge railing and went off the bridge. Merlin Olson sustained injuries resulting in total and permanent disability. A more detailed statement of the facts can be found in Olson v. Shellington, 167 Neb. 564, 94 N.W.2d 20.
Merlin Olson, by his mother and next friend, brought suit against the County of Wayne to recover damages for his injuries as a result of the alleged insufficiency and disrepair of the highway and bridge at the place of the accident. The trial court directed a verdict for the defendant at the conclusion of the evidence, and this court affirmed. Olson v. County of Wayne, 157 Neb. 213, 59 N.W.2d 400. Plaintiff then commenced an action against Thomas Shellington to recover for injuries sustained while riding as a guest in the automobile driven by Shellington. Whether or not Shellington was guilty of gross negligence was the primary issue in that case. The jury found for the plaintiff in the amount of $24,000 and added these words in its verdict: "We find slight negligence on the part of the defendant." The trial court set aside the inconsistent verdict and ordered a new trial. This court affirmed. Olson v. Shellington, 162 Neb. 325, 75 N.W.2d 709.
Upon a second trial of the case in the district court the jury found the driver of the automobile guilty of gross negligence and returned a verdict for the plaintiff for $50,000. This court on appeal held that the evidence was sufficient to take the case to the jury on the issue of gross negligence and affirmed the judgment. Olson v. Shellington, 167 Neb. 564, 94 N.W.2d 20. The insurance company thereupon paid $10,000 with interest and costs, such amount being its limit of liability under the provisions of the insurance policy.
The plaintiff thereafter commenced this action against the insurance company, alleging the issuance of the insurance policy to E. C. Shellington, that Thomas Shellington was an additional insured, the limit of liability as to any one person of $10,000, the offers to settle plaintiff's claims for $10,000, and the demands of Thomas Shellington that the offers of settlement be accepted; asserting negligence and bad faith by the insurance company in refusing to settle the claims for $10,000; and praying for judgment for $50,000. The insurance company denied liability and specifically denied that it was guilty of any negligence, or that it acted in bad faith in any manner in its handling of the litigation. For reply the plaintiff specifically denied that defendant was no longer obligated to pay any further amount by virtue of the issuance of the policy of insurance and otherwise generally denied the affirmative allegations of the answer. Upon the trial of the case the jury returned a verdict for plaintiff against the insurance company for $40,000. The insurance company has appealed. The insurance company assigns as error the failure of the trial court to sustain its motions for a directed verdict.
The liability of an insurer to pay in excess of the face of the policy accrues when the insurer, having exclusive control of settlement, in bad faith refuses to compromise a claim for an amount within the policy limit. The weight of authority is to the effect that when the insurer has the exclusive right to; settle a claim within the limits of its liability, it has an option to compromise but no obligation to do so. In the event the insurer elects to resist a claim of liability, or to effect a settlement thereof on such terms as it can get, there arises an implied agreement that it will exercise due care and good faith where the rights of an insured are concerned.
The amount of liability fixed by the insurance policy, upon which the premium is paid, determines the limit of the contractual liability and duty of the insurer. An insurer may settle a claim within its limit of liability as it chooses since the insured cannot be injured by a settlement to be wholly paid by the insurer. The exclusive power to settle a claim within the limits of its liability is therefore ceded to the insurer for its sole benefit. While an insured may compromise his possible liability over and above the limits of the insurance policy, he has no duty even to attempt to do so. He may rely upon the policy, the promise to indemnify in a fixed amount, and the duty of the insurer to defend and to use its discretionary authority to settle in good faith. It is clear that the insurance company is not liable to plaintiff for refusal to settle his claim unless the refusal was in bad faith. The question raised by this appeal is whether or not the evidence is sufficient to present a question for the jury as to the bad faith of the insurance company.
"Good or bad faith is a state of mind. Of necessity, it must be determined from proof of conduct, except as the owner of the mind discloses its operations. Defendants, being corporations, could act only through agents, whose state of mind is that of the defendants." City of Wakefield v. Globe Indemnity Co., 246 Mich. 645, 225 N.W. 643.
With these fundamental rules in mind we shall set forth the evidence upon which the verdict was returned. The testimony of plaintiff is to the effect that the serious injury sustained by Merlin Olson and the course of the litigation between plaintiff, the County of Wayne, and Thomas Shellington indicated that a judgment in excess of the limits of the insurance policy would be obtained and that it was negligence or bad faith on the part of the insurance company to refuse to settle the claim within the limits of the policy upon demand by Thomas Shellington that it do so. The evidence of the insurance company is that it honestly believed that gross negligence on the part of Thomas Shellington, the driver of the automobile involved in the accident, could not be established; in other words, that it was a nonliability claim. The evidence shows that the insurance company took statements from all persons having any knowledge concerning the accident. Its attorneys advised that gross negligence on the part of Thomas Shellington did not exist. The manager of the claim department, a lawyer, was of the opinion that gross negligence did not exist. The insurance company employed Guy C. Chambers, an able lawyer of long experience in personal injury cases involving gross and slight negligence, for an opinion as to whether or not Thomas Shellington could be held for gross negligence. His opinion was, after a study of the evidence in the Wayne County case, the statements and depositions taken, and a consideration of the Nebraska Supreme Court decisions, that gross negligence did not exist as a matter of law. After it was determined by the rulings of the district court that the evidence of gross negligence was sufficient to submit the case to a jury, the agents and legal counsel of the insurance company determined that the case could be successfully defended before an impartial jury. The question here is not whether its judgment was correct in analyzing the facts and the law of the case, but whether it acted honestly, without negligence, and in good faith.
We think the evidence shows conclusively that it used all available means to assemble the facts and to determine the applicable law. Whether or not the evidence was sufficient to sustain a finding of gross negligence was a close question as shown by the meticulous care with which the facts were considered by this court in Olson v. Shellington, 167 Neb. 564, 94 N.W.2d 20. "Courts, as well as attorneys, sometimes differ on the law applicable to a given state of facts." Berk v. Milwaukee Automobile Ins. Co., 245 Wis. 597, 15 N.W.2d 834. We find none of the elements of negligence or bad faith existed in the making of these determinations. The conclusion of the insurance company that it had a valid defense, although wrong, is not in itself evidence of negligence or bad faith. Byrnes v. Phoenix Assurance Co., 303 F.2d 649.
While it is true that the insurance company knew of the seriousness of the injuries sustained by Olson in the accident and would sustain a judgment for as much as $100,000, it was not bound to surrender its defense of nonliability to avoid being held for a judgment in excess of the limits of its policy. It cannot be held merely because its determination, honestly arrived at, proved to be erroneous in the light of subsequent events. The contention of the plaintiff is, in effect, that the insurance company, primarily in the light of previous litigation, should have foreseen a judgment against Thomas Shellington in excess of its policy limits and that its mistake in this respect amounts to negligence or bad faith. We think not.
In the instant case Thomas Shellington has at all times denied that he was guilty of any negligence. His demand that the insurance company settle the claim is not based, therefore, on any admitted liability on his part but on the theory that the insurance company should pay $10,000, which it claimed it did not owe, in order to relieve Shellington of the litigation and the incidents thereof. It is not negligence or bad faith on the part of an insurer to refuse a settlement which it honestly believes is not to its best interest merely to avoid the distasteful incidents of litigation on the part of its insured.
"Exclusive authority to act does not necessarily mean the right to act arbitrarily. * * * The right to control the litigation in all of its aspects carries with it the correlative duty to exercise diligence, intelligence, good faith, honest and conscientious fidelity to the common interest of the parties." Traders General Ins. Co. v. Rudco Oil Gas Co., 129 F.2d 621, 142 A.L.R. 799.
"* * * a defense going far enough to show reasonable and probable cause for making it will vindicate the good faith of the insurance company." Hall v. Preferred Acc. Ins. Co., 204 F.2d 844, 40 A.L.R. 2d 162.
"* * * it cannot be said to be bad faith to deny a claim when there is substantial evidence to support the denial." Kleinschmit v. Farmers Mut. Hail Ins. Assn., 101 F.2d 987.
The general rules as to the liability of the insurer are stated in Davy v. Public National Ins. Co., 181 Cal.App.2d 387, in the following apt language: "Good faith implies honesty, fair dealing and full revelation. * * * Bad faith implies dishonesty, fraud and concealment. * * * Neither mistaken judgment nor unreasonable judgment is the equivalent of bad faith. * * * As a consequence, liability upon the part of the insurer for refusal to accept an offer of settlement may not be predicated upon its failure to correctly predict the outcome of the action it is defending." As one court aptly stated: "The gift of prophecy has never been bestowed on ordinary mortals, * * *." Georgia Casualty Co. v. Mann, 242 Ky. 447, 46 S.W.2d 777.
There is a lack of uniformity in the cases in dealing with this subject. See, Annotations, 40 A.L.R. 2d 168, 68 A.L.R. 2d 892. We shall not undertake a discussion of the refinements of these cases. We think the controlling rule in the instant case is: If the insurer has exercised good faith in all of its dealings under its policy, if the settlement which it has rejected has been fully and fairly considered and has been based on an honest belief that the insurer could defeat the action or keep the judgment within the limits of the policy, and if its determination is based on a fair review of the evidence after reasonable diligence in ascertaining the facts, accompanied by competent legal advice, a court will not subject the insurer to liability in excess of policy limits if it ultimately turns out that its determination is a mistaken one. See Christian v. Preferred Acc. Ins. Co. 89 F. Supp. 888.
Where an insurer acts honestly and in good faith upon adequate information, it will not be held liable because it failed to correctly prophecy the result. The evidence of the plaintiff fails to make even a prima facie case of bad faith. The evidence of the insurance company which stands undisputed shows the good faith of the company in refusing to settle within the limits of the insurance policy. The trial court erred, therefore, in not sustaining the motion of the insurance company for a directed verdict at the close of all the evidence. The judgment of the district court is reversed and the cause remanded with directions to sustain defendant's motion for judgment notwithstanding the verdict and to dismiss the action.
REVERSED AND REMANDED WITH DIRECTIONS.