Awrey v. Progressive Cas. Ins. Co., 82-1363

• Decision Date: 28 February 1984
• Docket Number: No. 82-1363,82-1363
• Citation: 728 F.2d 352
• Parties: Norman Eugene AWREY, Plaintiff-Appellee, v. PROGRESSIVE CASUALTY INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 352

728 F.2d 352

Norman Eugene AWREY, Plaintiff-Appellee, v. PROGRESSIVE CASUALTY INSURANCE COMPANY, Defendant-Appellant.

No. 82-1363.

United States Court of Appeals Sixth Circuit.

Argued Nov. 10, 1983.

Decided Feb. 28, 1984.

John P. Jacobs, argued, Plunkett, Cooney, Rutt, Watters, Stanczyk & Pedersen, D.J. Watters, Detroit, Mich., for defendant-appellant.

Sherwin Schreier, Southfield, Mich., Richard E. Shaw, Detroit, Mich., Samuel Meklir, argued, Southfield, Mich., for plaintiff-appellee.

Before KEITH and KENNEDY, Circuit Judges and GIBSON, Senior Circuit Judge. ^*

CORNELIA G. KENNEDY, Circuit Judge.

Defendant-Appellant Progressive Casualty Insurance Company (Progressive) appeals from a verdict in favor of plaintiff-appellee Norman Awrey (Awrey). Awrey had alleged that Progressive had acted in bad faith in failing to offer policy limits to settle a tort action against Awrey at a time when it could have been settled for that amount, and consequently had exposed him to liability in excess of his insurance policy limits. Progressive denied acting in bad faith. It argued that its failure to settle was based on an honest belief that the tort action was not worth policy limits and that the claim could have been settled for less than policy limits.

Progressive did offer policy limits plus interest and costs during trial of that earlier tort action. This offer was refused by the injured party and a verdict of $175,000.00 was returned against Awrey. Progressive paid the policy limits of $20,000.00, plus interest on that amount and costs. Awrey has a judgment outstanding against him for the excess. Awrey has no assets, no house, no car, no bank account, and no job.

Awrey instituted this suit against Progressive for the amount of the excess liability in the prior litigation, alleging bad faith in Progressive's failure to settle. The jury returned a verdict for Awrey. On March 23, 1982, the District Court entered a judgment for Awrey in the amount of $213,358.24, the amount of the excess liability with interest. Progressive moved for a directed verdict and a judgment notwithstanding the verdict, which were denied.

Progressive makes three arguments on appeal. First, Progressive argues that the record does not support the jury's verdict of bad faith and that judgment notwithstanding the verdict should have been granted. We agree, and consequently do not reach Progressive's other arguments, which address the measure of damages recoverable under Michigan law by an indigent plaintiff in a "bad faith failure to settle" case, and challenge the District Court judge's charge to the jury. ¹ Briefly, the evidence presented to the jury on the question of bad faith was as follows.

Awrey was insured for automobile liability through Progressive with policy limits of $20,000.00. On November 2, 1975, he was involved in an automobile accident with one Roger Huston. Huston sustained injuries to his hip, knee and ankle. He sued Awrey for damages in the Ogemaw County, Michigan, Circuit Court in October of 1977. Progressive retained Robert Hetzler, an attorney in Bay City, Michigan, to represent Awrey. Progressive at that time advised Awrey, by letter, of his right to hire his own attorney, and Awrey declined to do so. On November 4, 1977, Hetzler received a file on the Huston-Awrey litigation. From this file he learned that Awrey had consumed a number of Valium pills, that he had been drinking, and that before the accident he had said that he was going to "pile his car up." Hetzler also received a police report which indicated that Awrey had crossed the center line before the accident occurred. Hetzler took Huston's deposition in August, 1978, and learned that Huston would attempt to relate a heart condition to the accident. In October, 1978, Hetzler received Huston's hospital records and reviewed depositions of several doctors who had examined Huston. Based on these documents Hetzler concluded that Huston did not have sufficient evidence to link the heart condition to the accident.

Hetzler requested a settlement demand from Huston's attorney, Sheldon Miller, on November 1, 1978. Miller replied on November 10, that he would accept the limits of Awrey's policy with Progressive, i.e., $20,000.00, but that this offer would remain open for only thirty days. Miller withdrew his offer in a letter to Hetzler dated December 27, 1978.

In early January, 1979, Hetzler recommended to Progressive that it offer Huston the policy limits of $20,000.00. Progressive wrote to the Awreys in January 1979, notifying them that Huston had demanded policy limits, but that Progressive planned to offer less than policy limits. Progressive did not disclose to the Awreys that Hetzler had recommended offering policy limits. The Awreys testified that they did not receive this letter. Progressive claims that it did not offer Huston the policy limits because a senior partner in Hetzler's firm and four attorneys at Progressive believed the suit was not worth $20,000.00 because Huston's heart condition could not be related to the accident.

Progressive extended settlement authority to Hetzler for up to $15,000.00. On January 30, 1979, Hetzler made a settlement offer of $12,000.00 to an attorney at Miller's firm. On February 13, 1979, the attorney from Miller's firm called Hetzler to tell him that the case could still be settled for the policy limits.

The case was tried in March, 1979. After opening statements at trial Hetzler offered $20,000.00, the policy limits, plus interest and costs. Huston's attorney responded with a demand for $25,000.00, which Progressive refused without communicating it to Awrey. Progressive says that it refused this counteroffer because it knew that Awrey himself had no assets with which to pay the difference between the $20,000.00 policy limits plus interest (approximately $23,000.00) and the $25,000.00. Awrey on Hetzler's advice then admitted liability, as a trial tactic to avoid having the jury hear evidence of Awrey's consumption of alcohol and Valium prior to the accident. The only issue for trial was the amount of Huston's damages. The jury returned an award of $175,000.00. A motion for new trial alleging that the verdict was excessive was denied. No appeal was taken.

Awrey then brought this action against Progressive, alleging Progressive's bad faith in failing to settle the Huston litigation. We conclude that the evidence was insufficient to sustain the jury's verdict of bad faith and a judgment notwithstanding the verdict should have been granted.

In reversing the District Court, we do not hold that the trial judge committed error in denying Progressive a judgment notwithstanding the verdict. After the District Court's decision was entered, the Michigan Court of Appeals decided the case of Medley v. Canady, 126 Mich.App. 739, 337 N.W.2d 909 (1983), clarifying what is required to prove an insurer's bad faith. We must apply Michigan law in this diversity action, Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); moreover, we must apply the law of Michigan as it now stands, rather than as it stood at the time this case was decided in the District Court. Vandenbark v. Owens-Illinois Glass Co., 311 U.S. 538, 61 S.Ct. 347, 85 L.Ed. 327 (1941). We believe that under Medley Progressive cannot on the evidence presented be held liable for bad faith in its failure to settle.

The seminal case in Michigan law on an insurer's liability for failure to settle is City of Wakefield v. Globe Indemnity Co., 246 Mich. 645, 225 N.W. 643 (1929). The court in Wakefield held that an insurer is liable to its insured for a judgment in excess of liability if the insurer acted in bad faith in failing to settle the case against the insured. Since Wakefield, courts have had the task of determining what constitutes "bad faith" on the part of an insurer. See Valentine v. Liberty Mutual Insurance Co., 620 F.2d 583 (6th Cir.1980); Transport Insurance Co. v. Michigan Mutual Liability Insurance Co., 496 F.2d 265 (6th Cir.1974); Jackson v. St. Paul-Mercury Indemnity Co., 339 F.2d 40 (6th Cir.1964); McCoy v. Zurich Insurance Co., 509 F.Supp. 1106 (E.D.Mich.1981), aff'd, 703 F.2d 564 (6th Cir.1982); Jones v. National Emblem Insurance Co., 436 F.Supp. 1119 (E.D.Mich.1977); Perlmutter v. Whitney, 60 Mich.App. 268, 230 N.W.2d 390 (1975).

Medley goes beyond previous cases in its requirements to establish an insurer's bad faith. Medley involved a suit by an insured against his insurer for bad faith failure to pay an undisputed claim under M.C.L.A. Sec. 500.2006(4). ² The trial judge in Medley had held that the actions of the insurer "were a classic example of what bad faith refusal to pay amounts to in its most rudimentary definition." 337 N.W.2d at 912. The court had cited the following acts which it believed supported a finding of bad faith: (1) failure to properly evaluate the seriousness of the police report; (2) failure to determine the extent of plaintiff's injuries; (3) conducting no further investigation after receiving the complaint; (4) failing to send for hospital records after notice of the claimed injury; (5) not offering to pay policy limits after receiving plaintiff's interrogatories; (6) failing to respond to plaintiff's demand letter; (7) misplacing the files; and (8) failing to consult with its in-home committee for approval of payment of plaintiff's demand. Id.

The Michigan Court of Appeals reversed the trial court's judgment of bad faith. The court held that "bad faith" under M.C.L.A. Sec. 500.2006(4) is "not simply negligence or bad judgment but rather the conscious doing of a wrong because of dishonest purpose or moral obliquity." 337 N.W.2d at 913. The court stated:

We fail to find a bad faith refusal to pay on the part of [the insurer] on these stipulated facts. They demonstrate that [the insurer] may have been negligent in failing to promptly respond [to the demand letter]. However, there is no evidence of...