Buntin v. Continental Ins. Co.

• Decision Date: 02 November 1981
• Docket Number: Civ. No. 77/99.
• Citation: 525 F. Supp. 1077
• Parties: Norman BUNTIN, Plaintiff, v. CONTINENTAL INSURANCE CO., Defendant.
• Court: U.S. District Court — Virgin Islands

525 F. Supp. 1077

Norman BUNTIN, Plaintiff, v. CONTINENTAL INSURANCE CO., Defendant.

Civ. No. 77/99.

District Court, Virgin Islands, D. St. Croix.

November 2, 1981.

Thomas Alkon, Christiansted, St. Croix, V. I., for plaintiff.

David V. O'Brien, O'Brien & Moore, Christiansted, St. Croix, V. I., for defendant.

MEMORANDUM

CHRISTIAN, Chief Judge.

This case involves what has been aptly called the "double barreled proposition"¹ that an insurance company owes two distinct duties to its insured: the duty to defend lawsuits against the insured and the duty to consider in "good faith" any offers to settle such lawsuits.² Before the Court are cross-motions for summary judgment. The motions present two specific questions: does an insurer's honest but erroneous belief that there is no insurance coverage lessen the insurer's duty to give appropriate consideration to settlement offers; and, do the facts presented, as a matter of law, make out a breach of the insurer's settlement obligations? As set forth more fully below, we hold that an insurer's obligations are not decreased by a mistaken belief in non-coverage and that the facts presented do make out a breach of this insurer's duty to give appropriate consideration to settlement offers.

I

The parties are in agreement as to the material facts involved. On July 4, 1975, one Marion Edwards rented a car from Preferred Rentals, Inc., a St. Croix car rental agency insured by the defendant, Continental Insurance Company. On July 6, 1975, Edwards was in the town of Christiansted in the company of Clement Richardson and the plaintiff Norman Buntin. The three set out for Fredriksted in the car rented by Edwards, with Buntin at the wheel. En route, Burtin drove on the wrong side of the road and collided with an oncoming car. Edwards was killed in the accident and Richardson received serious injuries.

Preferred Rentals' insurance policy with Continental was in the amount of $100,000 per person and $300,000 per accident for bodily injury liability. The policy contained the following standard clause: "... The company shall defend any suit against the insured alleging such injury ... and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; but the company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient."

In April 1976 two lawsuits were filed against Norman Buntin. Marion Edwards' personal representative filed an action for wrongful death and Clement Richardson filed an action for personal injuries. Buntin promptly tendered the defense of these actions to Continental, which, in turn, disclaimed coverage under its policy with Preferred Rentals and declined to defend. The two actions were consolidated and tried to the Court in November 1976. Buntin was represented by privately retained counsel. The consolidated actions resulted in two judgments against Buntin: a judgment of $165,000, plus interest at 9%, and attorney's fees of $1,875, in the wrongful death action, and a judgment of $26,500, plus interest at 9%, and attorney's fees of $1,875, in the personal injury action.

On December 2, 1976, Buntin's counsel received a post-judgment settlement offer. The offer stated that the "Estate of Marion Edwards" would accept $100,000, in lieu of the $165,000 judgment, plus attorney's fees, if payment was made within thirty days, and that Clement Richardson would accept $26,500 and forgo interest and attorney's fees if payment was made within the same period. Buntin's counsel forwarded the settlement offer to Continental and requested that the insurer accept the offer. Further, Buntin's counsel made reference to the $7,500 in legal fees incurred by Buntin in the defense of the actions against him. Counsel closed his letter with the statement that if Continental failed to accept the settlement offer he would be "required to institute legal actions to protect (his) client's interests."

Four months elapsed before Continental responded to the letter from Buntin. By its letter dated April 1, 1977, Continental rejected the tendered settlement offer. As its reason for so doing Continental contended that "Mr. Buntin was not a driver insured by the Continental Insurance Company at the time of the accident."

In May 1977 Buntin commenced this action against Continental. The complaint alleges that Buntin was covered by Continental's insurance policy with Preferred Rentals at the time of the 1975 accident and that Continental's refusal to defend or consider settlement offers in the cases stemming from that accident was therefore wrongful. Buntin seeks the full amount of the judgments against him, with interest, plus the cost of defending the tort actions, as damages for Continental's conduct. Continental in answering the complaint once again denied coverage. In September 1977, on cross motions for summary judgment, the District Court, 437 F.Supp. 132, agreed with Continental, found no coverage under the policy and entered judgment against Buntin. On appeal the United States Court of Appeals for the Third Circuit, 583 F.2d 1201, reversed, found coverage under the policy and remanded the cause for the entry of appropriate orders.

II

On the basis of the foregoing, Buntin urges that, as a matter of law, Continental breached its duty to defend him in the lawsuits stemming from the 1975 accident. For this breach, Buntin seeks payment of the judgments against him up to the limits of Continental's policy with Preferred Rentals and reimbursement of the legal fees incurred in defending those actions. Buntin further urges that, as a matter of law, Continental breached its duty to give "good faith" consideration to the post-judgment settlement offer. For this breach, Buntin seeks payment of the amount of the judgments against him that is in excess of the policy limits.³

Continental seems to have acquiesced, at least in part, to Buntin's first contention: Continental has paid Clement Richardson's judgment in full and has paid $100,000 plus interest on the judgment in the wrongful death action. Continental has declined to pay the $7,500 attorney's fees incurred by Buntin and it has, of course, declined to pay that amount of the judgments in excess of the policy limits. Continental offers no basis for its rejection of the attorney's fees claim. As to the claim for amounts in excess of the policy, Continental urges that it cannot be liable for such excess absent a showing of collusion or "bad faith" in its refusal to settle and that, as a matter of law, its honest belief that there was no coverage cannot constitute collusion or "bad faith". Further, Continental urges that it reasonably rejected the settlement offers because it had a valid third party claim against the Estate of Marion Edwards. Continental's reasoning on this point is that Edwards breached his rental agreement with Preferred Rentals when he permitted Buntin to drive the rented car and that consequently his Estate is liable to Continental (as a third party beneficiary or a subrogee) for all damages incurred by Continental because of Buntin's driving.⁴ Finally, Continental urges that its settlement obligations did not arise here because the settlement offer in the wrongful death action was made in the name of the "Estate of Marion Edwards" rather than in the name of Edwards' personal representative and was therefore incomplete and equivocal.

III

"Under a typical automobile liability insurance policy, such as the one before us, the insurer undertakes three distinct types of obligations... In the first place, the insurer agrees to indemnify against liability for personal or property damage... Secondly, the insurer agrees to defend the insured against any suits arising under the policy `even if such suit is groundless, false or fraudulent' ... Thirdly, by asserting in the policy the right to handle all claims against the insured, including the right to make a binding settlement, the insurer ... becomes obligated to act in good faith and with due care in representing the interest of the insured." Gedeon v. State Farm Mutual Automobile Ins. Co., 410 Pa. 55, 188 A.2d 320 (1963); quoted with approval in Gedeon v. State Farm Mutual Automobile Ins. Co., 342 F.2d 15 (3rd Cir. 1965). In the instant case we are concerned with both the duty to defend and the duty to give "good faith" consideration to settlement offers. The parameters of these duties are well settled when encountered separately. The law is less established when an insurer is charged with having breached both duties in a single case. An understanding of the distinctions between the two duties is necessary to appreciate the rule to be applied when both duties are said to have been breached.

A

The insurer's duty to defend is contractual: most insurance policies expressly obligate the insurer to assume the defense of lawsuits arising under the policy. A breach of the duty to defend is a breach of contract regardless of the insurer's reasons for denying the defense. Thus if an insurer refuses to defend a claim on the basis of an honest but erroneous belief that the policy involved extends no coverage, the insurer has nevertheless breached his contract. In short, the insurer refuses to defend at his peril. 49 ALR 2d 694, 711; Couch on Insurance, 2d § 51:52; Gedeon v. State Farm Mutual Automobile Insurance Co., 410 Pa. 55, 188 A.2d 320 (1963); Lujan v. Gonzales, 84 N.M. 229, 501 P.2d 673, 678 (N.M.1972); Landie v. Century Indemnity Co., 390 S.W.2d 558 (Mo.1965). The liability of the insurer for the simple breach of the duty to defend is ordinarily limited to the amount of the policy involved plus the insured's expenses in defending the action. "(I)t is reasoned that, if the insured has employed competent counsel to represent him, there is no ground for concluding that the judgment would have been for a lesser sum had the defense been conducted by insurer's counsel, and therefore it cannot be said that the...