Benkert v. Medical Protective Co.

• Decision Date: 16 March 1988
• Docket Number: Nos. 86-1177,86-1587,s. 86-1177
• Citation: 842 F.2d 144
• Parties: Jack E. BENKERT, M.D.; Allen B. Couch; and Hartford Accident & Indemnity Company, a foreign corporation, Plaintiffs-Appellants, v. MEDICAL PROTECTIVE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 144

842 F.2d 144

Jack E. BENKERT, M.D.; Allen B. Couch; and Hartford Accident & Indemnity Company, a foreign corporation, Plaintiffs-Appellants, v. MEDICAL PROTECTIVE COMPANY, Defendant-Appellee.

Nos. 86-1177, 86-1587.

United States Court of Appeals Sixth Circuit.

Argued Sept. 15, 1987.

Decided March 16, 1988.

Dennis J. Mendis, Feikens, Foster, Vandermale and DeNardis, P.C., Detroit, Mich., Lee A. Stevens, argued, for plaintiffs-appellants.

Richard A. Patterson, argued, Bloomfield Hills, Mich., for defendant-appellee.

Before ENGEL and RYAN, Circuit Judges, and PECK, Senior Circuit Judge.

RYAN, Circuit Judge.

Plaintiffs-appellants in this diversity action raise two issues in their appeal from the district court's order dismissing their state law claims against the defendant-appellee Medical Protective Company:

--Whether an insured may recover exemplary damages and damages for mental distress in an action against his insurer based on the insurer's alleged bad faith failure to settle a medical malpractice claim against the insured, and

--Whether an insured may assign to the "excess" coverage carrier and the malpractice claimant a cause of action against his primary insurance carrier for bad faith failure to settle.

We answer those questions no and yes, respectively, and hold:

--An insured may not recover exemplary damages or damages for mental distress where his insurer has acted in bad faith by failing to settle a malpractice action against the insured, and

--An insured's claim against his insurer for bad faith failure to settle is assignable.

I.

In 1972, Allen Couch brought a medical malpractice action against Dr. Jack Benkert. Benkert had two malpractice insurance policies. His primary insurer, Medical Protective Company (MPC), issued a policy providing $100,000 coverage, and his excess coverage insurer, appellant Hartford Accident & Indemnity Company (Hartford), issued a policy providing $1,000,000 in coverage. MPC maintained exclusive control over Benkert's defense in Couch's malpractice action.

The case went to trial in 1976, and a jury returned a verdict in favor of Couch in the amount of $510,000. Judgment, with interest, was entered for more than $600,000. MPC paid $100,000 towards the judgment and Hartford contributed $550,000. Hartford declined, however, to cover the full judgment exclusive of MPC's payment and Benkert still owes Couch a balance of over $100,000.

Benkert thereafter claimed that MPC should never have permitted the malpractice case to go to trial because of the probability of an adverse jury verdict in excess of the MPC policy limits. He accused MPC of negligently and in bad faith refusing to settle the case within the limits of its $100,000 primary policy. In return for Couch's covenant not to sue Benkert for the unpaid balance of Couch's judgment, Benkert assigned to Couch his right of action against MPC for its alleged bad faith failure to settle. Benkert also assigned the cause of action to Hartford. However, Benkert retained his claims for exemplary damages and mental distress.

Benkert, Couch and Hartford then brought this diversity action against MPC. Their complaint set forth four claims which can be summarized as follows:

Count I: Benkert's cause of action for emotional and physical distress arising from MPC's failure to settle with Couch.

Count II: Couch's cause of action as assignee of Benkert's claim against MPC for MPC's negligent and bad faith failure to settle.

Count III: Hartford's cause of action as assignee of Benkert's claim against MPC for MPC's negligent and bad faith failure to settle.

Count IV: Hartford's cause of action against MPC for MPC's negligent and bad faith failure to settle.

MPC moved the district court, under Fed.R.Civ.P. 12(c), for judgment on the pleadings with respect to Counts I, II and III of the plaintiffs' complaint. The court denied the motion as to Count I and took the remainder of the motion under advisement pending the Michigan Supreme Court's decision of the district court's certification to it of issues of state law relating to all three Counts. When the Michigan Supreme Court declined to grant the petition for certification, the district court, 635 F.Supp. 1466, upon reconsideration of its earlier decision denying dismissal of Count I, reversed itself and granted defendant's motion to dismiss Benkert's complaint. In addition, the court ordered dismissal of Counts II and III, concluding that Benkert's causes of action against MPC were not assignable. The plaintiffs now appeal the district court's judgment of dismissal of all three counts.

II.

Benkert's Count I claim against MPC for damages is based upon two theories of liability. First, Benkert seeks to recover in contract all damages which can reasonably be said to have been contemplated by MPC and him at the time MPC issued Benkert's primary insurance policy including damages for mental distress and exemplary damages. Second, Benkert argues that MPC tortiously breached a duty to settle Couch's claims within its policy limits and that he is entitled to all damages proximately caused by the breach. The district court's order dismissing Count I of plaintiff's complaint was based upon the authority of Valentine v. General American Credit, Inc., 420 Mich. 256, 362 N.W.2d 628 (1984), and Kewin v. Massachusetts Mutual Life Ins. Co., 409 Mich. 401, 295 N.W.2d 50 (1981). We agree with the district court's analysis and disposition of the Count I claim and we affirm.

A.

Analysis of Benkert's theory of entitlement to exemplary damages and damages for mental anguish flowing from MPC's alleged bad faith refusal to settle Couch's malpractice claim must begin with Kewin. In Kewin, the plaintiffs sought both exemplary damages and damages for mental anguish as the result of the defendant insurer's bad faith refusal to pay the plaintiff's entire claim under the terms of his disability income policy. The Kewin court began by citing the rule of Hadley v. Baxendale, providing that damages recoverable for a breach of contract are those that

may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.

9 Exch. 341, 354, 156 Eng. Rep. 145 (1854). Despite the far-reaching potential of that language in Hadley, the court noted that it had previously allowed damages for mental distress in a breach of contract action only where the contract was of a "personal" and not a "commercial" nature. The court was referring to Stewart v. Rudner, 349 Mich. 459, 84 N.W.2d 816 (1957), in which it held that mental distress damages were "within the contemplation of the parties" in a case in which a physician breached a contract to deliver a child by caesarean section and the child died. Stewart, 349 Mich. at 472, 84 N.W.2d 816. The court reasoned that such a contract involves "rights we cherish, dignities we respect, emotions recognized by all of us as both sacred and personal." Id., at 469, 84 N.W.2d 816.

The Kewin court characterized the plaintiff's disability income policy in that case as a commercial contract because "[n]o reason appears to conclude that either party contemplated any special damages, and certainly none can be said to flow naturally from the breach." Kewin, 409 Mich. at 418, 295 N.W.2d 50.

Insurance contracts for disability income protection do not come within the reach of Stewart. Such contracts are commercial in nature: they are agreements to pay a sum of money upon the occurrence of a specified event.... The damage suffered upon the breach of the agreement is capable of adequate compensation by reference to the terms of the contract. We recognize that breach of the insurance contract, as with almost any agreement, results in some annoyance and vexation. But recovery for those consequences is generally not allowed, absent evidence that they were within the contemplation of the parties at the time the contract was made.

Id. at 416-17, 295 N.W.2d 50.

Kewin also barred recovery of exemplary damages in a breach of commercial contract action. "In Michigan, exemplary damages are recoverable as compensation to the plaintiff, not as punishment of the defendant." Id. at 419, 295 N.W.2d 50.

In commercial contract situations, unlike the tort and marriage contract actions, the injury which arises upon a breach is a financial one, susceptible of accurate pecuniary estimation. The wrong suffered by the plaintiff is the same, whether the breaching party acts with a completely innocent motive or in bad faith....

We hold that absent allegation and proof of tortious conduct existing independent of the breach, ... exemplary damages may not be awarded in common law actions brought for breach of a commercial contract.

Id. at 419-20, 295 N.W.2d 50 (citations omitted).

Subsequently, in Valentine v. General American Credit, Inc., 420 Mich. 256, 362 N.W.2d 628 (1984), a case involving a claim for mental distress damages arising out of the breach of an employment contract, the Michigan Court reaffirmed the Kewin analysis.

Under the rule of Hadley v. Baxendale, literally applied, damages for mental distress would be recoverable for virtually every breach of contract.

Id. at 260, 362 N.W.2d 628.

Rather than look to the foreseeability of loss to determine the applicability of the exception, the courts have considered whether the contract "has elements of personality" and whether the "damage suffered upon the breach of the agreement is capable of adequate compensation by reference to the terms of the contract."

Id. at 262, 362 N.W.2d 628 (citing, Kewin, 409 Mich. at 417, 295 N.W.2d 50).

In dismissing Count I of the plaintiffs' complaint, the district court held that Benkert had failed to state a claim for exemplary and mental distress damages...