Liberty Mutual Insurance Company v. Davis

• Decision Date: 30 May 1969
• Docket Number: No. 25515.,25515.
• Citation: 412 F.2d 475
• Parties: LIBERTY MUTUAL INSURANCE COMPANY, Appellant, v. Oliver DAVIS and Lillie Mae Davis, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

412 F.2d 475 (1969)

LIBERTY MUTUAL INSURANCE COMPANY, Appellant, v. Oliver DAVIS and Lillie Mae Davis, Appellees.

No. 25515.

United States Court of Appeals Fifth Circuit.

April 7, 1969.

Rehearing Denied and Rehearing Denied May 30, 1969.

COPYRIGHT MATERIAL OMITTED

Charles W. Pittman, Charlie Luckie, Jr., John R. Bush, MacFarlane, Ferguson, Allison & Kelly, Tampa, Fla., for appellant.

James W. Cullis, Daniel Scarritt, Icard, Merrill, Cullis, Timm & Holroyd, Sarasota, Fla., for appellees.

Before WISDOM, GODBOLD and SIMPSON, Circuit Judges.

Rehearing Denied and Rehearing En Banc Denied May 30, 1969.

WISDOM, Circuit Judge:

This diversity action is based on an insurance company's alleged bad faith in failing to settle certain personal injury claims within the limits of an insured's automobile liability insurance policy. The distinctive feature of the case is that there were multiple claims against an insolvent insured exceeding the limits of his policy. We affirm the judgment in favor of certain claimants, assignees of the insured.

Clinton Bess, the insured, an itinerant fruit-picker, was driving in Sarasota, Florida, November 25, 1962, when his automobile struck the rear end of a car occupied by Mr. and Mrs. Lewis Rawls. Bess' car careened head-on into a car occupied by the plaintiffs, Mr. and Mrs. Oliver Davis and their three children. The double collision resulted in serious injury to the five Davises and the two Rawlses. There has never been any question as to Bess' responsibility for the accident.

Liberty Mutual had issued an automobile liability policy to Bess with limits of $10,000 for personal injury to one person, $20,000 for personal injuries in one accident, and $5,000 for property damage.¹ It was soon evident to all concerned that the injury to two Davises alone would exceed $20,000, and that the Rawls claim also would exceed $20,000.² The insurer could expect no contribution from Bess; he was penniless.

The Davises' attorney, Robert Thompson, by telephone on March 27, 1963, to Richard A. Valeri, Tampa Claims Manager for Liberty Mutual, and by letter dated March 29, 1963, offered to compromise for $20,000. Liberty Mutual never questioned its responsibility to expend its policy limits on behalf of Bess and it recognized that six of the seven claimants had substantial injuries. The insurer refused the offer to compromise for fear that it would be liable to the Rawls, if it depleted the entire amount of the insurance proceeds by settling with the Davises. Thompson recalled his conversation with Valeri of March 27, 1963, as follows:

He Valeri then said that they were — they meaning the company — were worried about having to make a payment over and above the 20; that they were afraid that if they paid my clients the policy limits, all that was available, that because of the Rawlses being involved in the accident also that they might have to pay to the Rawlses something over and above the 20. In other words, they only wanted to pay the 20.

An inter-office memorandum written by Valeri corroborates this explanation of Liberty Mutual's reluctance to settle with the Davises:

I can\'t see how we can make any definite commitments in view of the Rawls claims. Needless to say, we will promptly expend our efforts to line up both cases, obtain and confirm special. It would seem a very good likelihood that we will be willing to put our policy limits of 20,000 on the line for all claims of both vehicles as soon as we get them lined up.

On April 22, 1963, in response to a request by Valeri, G. I. Miller, house counsel for Liberty Mutual, reviewed the state of the law with regard to the settlement of multiple claims. He noted that "the primary duty is to our insured" and that this duty "is not diminished by reason of the fact * * * that our named insured lacks any financial responsibility". The memorandum continued:

we are at liberty to compromise and settle any one or more of the asserted claims prior to reduction to judgment, even though our limits are exhausted in the process, without incurring liability to other claimants, and even though such other claimants later may become judgment creditors. New York follows the rule of "first in time, first in right", which rule applies as well to amicable settlements as to judgments. David v. Bauman 24 Misc.2d 67, 196 N.Y.S.2d 746 (1960). As a corrolary, we may not refuse a claimant\'s reasonable offer of settlement upon the theory that to pay such a reasonable settlement would exhaust our coverage limits, for to do so would leave us open to the familiar charge that we failed in bad faith to settle a claim within policy limits, having had an opportunity to effect such a settlement on a reasonable basis. I believe the same results would obtain should Florida law be applied. Auto Mutual Indemnity Co. v. Shaw 134 Fla. 815, 184 So. 852 (Fla.1938).

Miller was aware of Professor Keeton's suggestion³ that in cases involving multiple claims the courts ought to recognize some form of allocation proceeding to determine percentages of available limits of coverage applicable to the several claims. Miller observed, however, that "no court has yet followed Professor Keeton's suggestion" and the company "would be under no duty to initiate such proceedings". The memorandum concludes:

I do offer the practical suggestion that all potential claimants involved in the 10 P.M. episode, or their attorneys, be notified that the value of claims will doubtless exceed limits, and that these people be invited to participate jointly in efforts to reach agreement as to disposition of available funds. If agreement cannot be reached after expenditure of reasonable effort, then I can see no present reason why individual claims could not thereafter be disposed of individually on the basis of fair value, first come, first served.

Liberty Mutual ignored this advice from its home office counsel. Instead, it instructed Valeri to delay payment to the Davises pending the company's filing proceedings under the Federal Interpleader Act to bring both the Rawlses and the Davises into court. This suit was indeed filed.

May 8, 1963, the Davises sued Bess in the Circuit Court for Sarasota County. Thompson wrote Valeri that same day stating that "suit will be filed this date". He did not enclose a copy of the pleadings, and Bess, then in prison, failed to forward to the insurer any of the papers with which he was served. The Florida Circuit Court granted a preliminary default judgment on the issue of liability and set the case for final hearing on June 27, 1963. June 21, 1963, Liberty Mutual received notice from Thompson of the final hearing. June 25, 1963, Bess requested Liberty Mutual to defend the suit. June 26, 1963, an attorney whom the insurer had employed to defend Bess, filed a motion for a continuance and a motion to set aside the default. When the case was called for trial on damages the court summarily denied the defendant's motions. With scant ceremony, the insurer's attorney walked out, leaving Bess without representation on the issue of damages. The Court, sitting without a jury, awarded a judgment in favor of Mr. and Mrs. Davis for $48,500. The Florida Court of Appeals affirmed the judgment January 8, 1965, and, February 17, 1965, denied the petition for rehearing.

Again, Liberty Mutual had an opportunity to settle with the Davises. By letter dated March 9, 1965, Thompson offered to compromise the judgment for the policy limits if the demand should be met by March 19, 1965. The insurer took no action.

The Davises next petitioned for a writ of garnishment. Without opposition, the Florida court entered judgment against Liberty Mutual for $27,526.85. This amount included the full policy proceeds, interest, and expenses. Liberty Mutual paid the garnishment judgment May 5, 1965.

The following October, the plaintiffs' attorney approached Bess, who was still in prison, and obtained for the Davises an assignment of any claim that Bess might have against Liberty Mutual for the damage to Bess resulting from the company's refusal to settle the Davises' claim. In consideration of this assignment, the Davises released their claim to the unpaid portion of Bess' judgment debt.

The assignees then sued upon the refusal-to-settle claim. Libery Mutual removed the case to the District Court for the Middle District of Florida, under Title 28 U.S.C. § 1441. At the close of evidence, the district court denied the insurer's motion for a directed verdict on the issue of bad faith in the refusal to settle. The jury returned a vedict in favor of the Davises for $27,593 with interest at the rate of 6 per cent from May 5, 1965. The court added $10,000 for attorneys' fees.

I.

The central issue in the case is whether the insurer was guilty of bad faith in refusing to settle with the Davises. The insurer concedes that there may be some question whether its concern about being a volunteer was legally justifiable, but insists that it was a good faith concern. The insurer contends that the trial court erred in not directing a verdict in its favor; erred in its charge to the jury on bad faith; erred in allowing evidence of negotiations before suit was filed; and erred in refusing to permit the insurer's experts to testify as to Liberty Mutual's good faith.

A. The first Florida decision involving the liability of an insurer for failure to settle within policy limits is Automobile Mutual Indemnity Co. v. Shaw, 1938, 134 Fla. 815, 184 So. 852. The Court held the insurer to "that degree of care and diligence which a man of ordinary care and prudence should exercise in the management of his own business". Yet at the same time the Court approved the "prevailing rule * * * that the insurer must act in good faith toward the assured in its effort to negotiate a settlement". This ambivalent langauge was construed in American Fidelity & Casualty Co. v. Greyhound Corporation, 5 Cir. 1956, 232 F.2d 89. This Court, in reversing and...