Kunkel v. United Sec. Ins. Co. of N. J.

• Citation: 168 N.W.2d 723,84 S.D. 116
• Decision Date: 11 June 1969
• Docket Number: No. 10570,10570
• Parties: Charles G. KUNKEL, Plaintiff and Respondent, v. UNITED SECURITY INSURANCE COMPANY OF NEW JERSEY, a corporation, Defendant and Appellant.
• Court: Supreme Court of South Dakota

Page 723

168 N.W.2d 723

84 S.D. 116

Charles G. KUNKEL, Plaintiff and Respondent, v. UNITED SECURITY INSURANCE COMPANY OF NEW JERSEY, a corporation, Defendant and Appellant.

No. 10570.

Supreme Court of South Dakota.

June 11, 1969.

Braithwaite, Cadwell & Braithwaite, Sioux Falls, for defendant and appellant.

John E. Burke, Sioux Falls, for plaintiff and respondent.

HOMEYER, Judge.

The defendant, United Security Insurance Company, hereafter called United, issued to the plaintiff, Charles G. Kunkel, a public liability insurance policy insuring him against claims for death or bodily injury and property damage resulting from the operation of Kunkel's automobile. The limits of the policy for death or bodily injury went $25,000 for one person and $50,000 for one accident and $5,000 for damage to property. While this policy was in force Kunkel drove his car into the rear of an automobile being driven by Richard D. Ronken. In a subsequent suit Ronken recovered judgment against Kunkel for $45,022.28 for damages to his person and property upon a verdict by a jury. Thereafter, United paid its policy limits of $25,000 for bodily injury, and $1,224 for property damage, together with interest to date of payment, and costs.

This action was brought by Kunkel to recover the unpaid portion of the judgment, $18,798.58, with interest, from United, plus damages for mental suffering and punitive damages. ¹ The complaint alleged the prior suit and judgment; the issuance of the aforementioned insurance policy and defense of the suit by United; an offer to United to settle for $25,000 before the jury verdict; that United knew, or in good faith should have known, that the jury would render a verdict in excess of liability coverage, and did not in good faith refuse to settle or attempt to settle the claim.

United defended on the basis (1) that the offer of $25,000 was not accepted because of prior instructions from Kunkel ² and (2) that United had in good faith discharged its obligations under the policy of insurance. Trial resulted in a jury verdict for $18,798.58 plus interest together with damages of $10,000 for mental suffering and judgment was entered thereon. Motion for judgment n.o.v. and in the alternative for a new trial wa denied and this appeal followed.

The principal questions presented are the sufficiency of the evidence to sustain the verdict, and if we so hold, whether damages should be allowed for mental suffering.

Sufficiency of the Evidence

The policy was a standard family automobile policy and contained the usual provisions requiring United to defend any suit against Kunkel and gave the company the right to make such investigation and settlement of any claim or suit as it deemed expedient.

Although there has been no prior expression from this court on the subject, it is well established that an insurance company which has issued a liability insurance policy limited in the amount of its coverage may so conduct itself so as to be liable for the entire judgment recovered against its insured irrespective of policy limits. For a collection and discussion of cases from other jurisdictions, see Annot., 40 A.L.R.2d 168, and Later Case Service, Vol. 4, page 649; Keeton 'Liability Insurance and Responsibility for Settlement', 67 Harvard Law Review, 1136, and 'Ancillary Rights of the Insured Against His Liability Insurer', 28 Ins.C.J. 395; Wymore, 'Safeguarding Against Claims in Excess of Policy Limits', 28 Ins.C.J. 44; 'Insurer's Liability To Insured for Judgments Exceeding Policy Limits', 7 Drake Law Review 23; (May, 1958) 7 Am.Jur.2d, Automobile Insurance, 155 et seq.; 45 C.J.S. Insurance § 936; 7A Appleman, Insurance and Law Practice, §§ 4712, 4713.

Courts differ as to the degree of proof which the insured must make in order to recover any excess above policy limits. Some have held that where an insurer has assumed control of the defense and it has the opportunity to settle the claim within policy limits, it must do so, if that is the reasonable thing to do and it may be liable for negligently failing so to do. 45 C.J.S. Insurance § 936b, and cases shown in note 23. Other courts hold the insured to a high degree of proof and to show fraud or bad faith, and seem to equate one with the other. City of Wakefield v. Globe Indemnity Co., 246 Mich. 645, 225 N.W. 643. A few courts have held that either bad faith or failure to use ordinary care may lead to liability. Southern Farm Bureau Cas. Ins. Co. v. Parker, 232 Ark. 841, 341 S.W.2d 36; Cernocky v. Indem. Ins. Co. of North America, 69 Ill.App.2d 196, 216 N.E.2d 198. However, even in so-called strictly bad faith jurisdictions, courts hold that the character and extent of an insurer's negligence are factors to be considered by the trier of fact in weighing the matter of bad faith. Baker v. Northwestern Nat. Cas. Co., 26 Wis.2d 306, 132 N.W.2d 493.

In Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 231 N.W. 257, 235 N.W. 413, in discussing bad faith and negligence in this area of the law, the court made the following observation on the use of such terms:

'Terms which are not strictly convertible or synonymous have been used by different courts to indicate the same thing. Negligence has been used by some courts to mean the same thing that other courts have designated as bad faith. Bad faith, especially, is a term of variable significance and rather broad application. Generally speaking, good faith means being faithful to one's duty or obligation; bad faith means being recreant thereto. In order to understand what is meant by bad faith, a comprehension of one's duty is generally necessary, and we have concluded that we can best indicate the circumstance under which the insurer may become liable to the insured by failure to settle by giving with some particularity our conception of the duty which the written contract of insurance imposes upon the carrier.'

Appleman in his well known text on insurance cited supra has said that the two terms 'bad faith' and 'negligence' are often used interchangeably by courts and 'that the conclusion must be drawn that mere terminology means little. It is rather the factual situation which is significant in the light of the duty which exists, and normally the trier of fact must make the determination of liability or nonliability.'

The trial court submitted the matter to the jury under the bad faith rule which we believe to be the better rule and the one prevailing in the majority of jurisdictions and we approve it. See 7 Am.Jur.2d, Automobile Insurance, § 156. However, as stated supra, the character and extent of the insurer's negligence are factors to be considered by the trier of fact in determining if there is bad faith. The insured has the burden of establishing his claim by a preponderance of the evidence.

Good faith is a broad and comprehensive term. Whether an insurer had adhered to it usually depends upon circumstances and elements involved in a particular case. The decision not to settle must be thoroughly honest, intelligent, and impersonal. It must be a realistic decision tested by the expertise which an insurer necessarily assumes under the terms of its policy. Where the insurer recognizes liability and the probability of a verdict in excess of policy limits circumstances constituting a failure to exercise good faith may weigh in favor of an insured. Exposure to a potential judgment against which there is only pertial protection makes it obvious that ordinarily there is a conflict of interest when the opportunity arises to settle a claim within the coverage of the policy.

When can it be said that an insurer has breached its duty to exercise good faith? While no single satisfactory test has been formulated as to what constitutes good or bad faith courts uniformly hold that the insured's interests must be considered. It appears to have been most frequently held the insured's interests must be given 'equal consideration' with those of the insurer, Farmers Insurance Exchange v. Henderson, 82 Ariz. 335, 313 P.2d 404, Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 319 P.2d 69, 66 A.L.R.2d 1202, or as it is often expressed 'at least equal consideration'. Am.Fidelity & Cas. Co. v. G. A. Nichols Co., 10 Cir., 173 F.2d 830; Potomac Ins. Co. v. Wilkins Co., 10 Cir., 376 F.2d 425. Sometimes the duty to exercise good faith and give equal consideration is expressed by telling the jury that in making the decision whether to settle or try a case, the insurer must in good faith view the situation as it would if there were no policy limits applicable to the claim. Am. Fidelity & Cas. Co. v. L. C. Jones Trucking, Okl., 321 P.2d 685; Cowden v. Aetna Cas. & Surety Co., 389 Pa. 459, 134 A.2d 223; Bowers v. Camden Fire Ins Asso., 51 N.J. 62, 237 A.2d 857; Murach v. Mass. Bonding & Ins. Co., 339 Mass. 184, 158 N.E.2d 338. The enunciation of this rule is not difficult, but its application may be Troublesome. It has been said to be 'a matter of consideration of comparative hazards.' Farmers Insurance Exchange v. Henderson, supra.

In Brown v. Guarantee Ins. Co., supra, the California court lists some factors which should be considered in deciding whether an insurer's refusal to settle constituted a breach of its duty to exercise good faith; namely: (1) the strength of the injured claimant's case on the issues of liability and damages; (2) attempts by the insurer to induce the insured to contribute to a settlement; (3) failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured; (4) the insurer's rejection of advice of its own attorney or agent; (5) failure of the insurer to inform the insured of a compromise offer; (6) the amount of financial risk to which each party is exposed in the event of a refusal to settle; (7) the fault of the insured in inducing the insurer's rejection of the compromise offer by misleading it as to the facts; and (8) any other factors tending to...