Carter v. Aetna Casualty and Surety Company

• Decision Date: 16 February 1973
• Docket Number: No. 72-1338.,72-1338.
• Parties: Jerry V. CARTER, Appellant, v. AETNA CASUALTY AND SURETY COMPANY, Appellee, A. C. WOODS, Third-Party Defendant.
• Court: U.S. Court of Appeals — Eighth Circuit

473 F.2d 1071 (1973)

Jerry V. CARTER, Appellant, v. AETNA CASUALTY AND SURETY COMPANY, Appellee, A. C. WOODS, Third-Party Defendant.

No. 72-1338.

United States Court of Appeals, Eighth Circuit.

Submitted October 18, 1972.

Decided February 16, 1973.

Maurice Cathey, Paragould, Ark., for appellant.

G. D. Walker, Jonesboro, Ark., for appellee.

Before LARAMORE, U. S. Court of Claims Senior Judge,^* BRIGHT and ROSS, Circuit Judges.

BRIGHT, Circuit Judge.

Appellant Jerry V. Carter sustained severe bodily injuries in a two car collision occurring June 30, 1966, on a public highway in the State of Missouri. At that time a person we shall call Mary Margaret¹ drove a 1961 Chevrolet across the center line of the highway and into a stationwagon driven by Carter. Carter later brought suit in a state court of Missouri against Mary Margaret and recovered a judgment by default in the sum of $61,000. Thereafter he brought the present action in the United States District Court against Aetna Casualty & Surety Co. (Aetna), claiming that a garageman's liability policy issued to A. C. Woods d/b/a Woods Equipment Co., of Corning, Arkansas, afforded coverage to Mary Margaret for an amount in excess of this judgment. He alleged that Mary Margaret was an additional insured under the policy, since she was driving an automobile owned by the named insured, A. C. Woods, with his permission.² Aetna defended this action on the ground that Mary Margaret had purchased the automobile from Woods,³ or in the alternative that Mary Margaret's breach of policy provisions and her collusive conduct with Carter in the Missouri lawsuit insulated Aetna from any liability under the policy.

The district court submitted only the issue of ownership to a jury and its verdict determined Woods to have been the owner of the 1961 Chevrolet at the time of the accident in question.⁴ The district court thereafter ruled favorably to Aetna on its policy defenses and ordered Carter's action dismissed. Carter brings this appeal from the judgment of dismissal. We vacate the judgment and remand this cause to the district court for further proceedings.

Although a jury heard this case, the trial court in effect followed procedures under Rule 49(a) Fed.R.Civ.P. by making additional findings on issues which were not submitted to the jury. Thus, the jury determination amounted to a special verdict only on the issue of ownership. Neither party demanded that the trial court submit the remaining issues to the jury before the jury retired. Therefore, the subsequent fact-findings of the court will be reviewed under the clearly erroneous standard of Rule 52(a), Fed.R.Civ.P.

We turn to the rather unusual facts in this case. Although the ownership of the vehicle was hotly contested, we adopt the version presented by Carter as consistent with the jury's verdict. The testimony indicated that Mary Margaret and Woods had been involved in a meretricious relationship from the time the automobile had been furnished to Mary Margaret (approximately a month before the accident) up to and including the day that the accident with Carter actually occurred. Mary Margaret and Woods would often meet at places distant from the residences of each to carry on their illicit relationship. Mary Margaret had no means of transportation during the one-month period in question other than Woods' automobile.

Following the accident, Woods prepared documents showing that his sales agency, Woods Equipment Company, had sold the vehicle to Mary Margaret on May 3, 1966. According to Mary Margaret, Woods prepared these documents "so it would cause no trouble to either side his wife or her husband."

An adjuster for the insurance carrier affording collision insurance on Carter's vehicle and Workmen's Compensation coverage for Carter's employer made inquiry of Woods concerning his insurance. Woods advised the adjuster that he had reported the accident to his insurer, when no report had in fact been made.

Carter named Mary Margaret and Woods as defendants in the Missouri lawsuit, alleging in part that Woods owned the vehicle driven by Mary Margaret and that she operated the vehicle as his agent. At this time Mary Margaret did not know of the name of Woods' insurance carrier. Upon receipt of the suit papers she turned them over to Woods. An identical summons and complaint were transmitted by Woods to his local insurance agent, and thereafter forwarded by the agent to Aetna in late June, 1968, together with an accident report containing the following details:

Insured sold 1961 car to Mary Margaret * * * on May 3, 1966. On June 30 she had an accident with a vehicle driven by Jerry V. Carter. Complaint alleges Woods was owner or Mary Margaret was agent of insured. Insured has no connection with party to this suit.

In due course a local Missouri attorney, Manuel Drumm, acting on instructions from Aetna, filed an answer on behalf of defendant-Woods only. This attorney recognized that the complaint contained allegations bringing Mary Margaret within the coverage of the policy. The file forwarded to him also contained Mary Margaret's address, but little else.

Drumm requested that Aetna make sure that Woods did not own the vehicle. Aetna responded by sending the attorney further documentation of the sale. Neither Aetna nor the attorney investigated further by inquiring of the facts from Mary Margaret.

During the pendency of this Missouri suit, Carter's attorney, George Wilhoit of Poplar Bluff, Missouri, inquired whether Drumm would file an answer to the complaint on behalf of Mary Margaret. On this occasion Wilhoit advised Drumm that Mary Margaret had been dating Mr. Woods and that he understood that Woods owned the car in question.

On September 25, 1968, Wilhoit abruptly dismissed the lawsuit against Woods. Wilhoit, in his testimony in this trial, stated that he could not show any agency relationship between Mary Margaret and Woods in order to hold Woods in the lawsuit. The dismissal resulted in the cancellation of a proposed deposition of Mary Margaret. Carter's attorney wrote to Drumm to advise him of the dismissal of the suit against Woods, and somewhat facetiously extended congratulations for winning a case so easily.

Although he recognized Mary Margaret to be judgment-proof, Wilhoit, preceding the default hearing, prepared an agreement under which Carter agreed to collect any judgment from insurance carriers, but not from Mary Margaret.⁵ Soon thereafter, on September 30, 1968, Carter submitted proof of damages in the action to the Missouri State Court, which made an award of $61,000 in his favor. In late June, 1969, Carter brought this suit to collect the judgment from Aetna.

In determining that Aetna sustained no liability for the judgment, the district court drew four conclusions from the evidence:

(1) That Aetna made a reasonable and diligent investigation into the ownership of the car.

(2) That Mary Margaret failed to give adequate notice of the claim to Aetna.

(3) That Mary Margaret was guilty of collusion with a party who was acting adversely to Aetna's interest, and therefore breached the cooperation clause of the policy, thus relieving the company from affording her coverage.

(4) That Carter is estopped to recover under the policy because of the conduct of his attorney, whose actions prevented Aetna from receiving effective notice of the basis of the claim against Mary Margaret.

I. THE REASONABLENESS OF THE INSURER'S INVESTIGATION

The complaint in the Missouri suit alleged that Woods owned the automobile involved in the accident, and that Mary Margaret was operating the vehicle as Woods' agent. Manuel Drumm, Aetna's local attorney, testified to his recognition that these allegations brought Mary Margaret squarely within the definition of an additional insured under the Aetna policy. Moreover, he acknowledged that these allegations obligated Aetna to respond to the suit on behalf of Mary Margaret regardless of the falsity of such allegations. Aetna's adjuster gave similar testimony. Drumm also advised Aetna that it might owe Mary Margaret a defense. Drumm testified further that counsel for an insurance carrier was not justifiably entitled to rely solely upon an insured's statement of the facts. Aetna's adjuster also acknowledged that an adjuster does not rely exclusively on the insured's summary of important incidents. But neither man contacted Mary Margaret or carried out an independent investigation.

Here, the record shows that Aetna needed only to interview Mary Margaret to learn of the dispute as to ownership of the 1961 Chevrolet. Instead the company followed an ostrich-like philosophy of keeping its head buried in the sand until the institution of this lawsuit, when it was forced to become aware of potential liability under its policy. Aetna then defended this case by arguing that others took advantage of it when it had no knowledge of the true situation. We think it essential that an insurer, when notified of the existence of a claim against an insured as well as against an additional insured, must make a reasonable investigation of the facts.

The district court held that Aetna was relieved from liability under the policy because Aetna had made a reasonable investigation. On the testimony summarized above, we find this determination to be clear error.

Arkansas law⁶ recognizes that there is an obligation of an insurer to defend a lawsuit brought against its insured, if the cause of action is within the coverage of the policy. This obligation is broader than the insurer's obligation to pay the judgment, and is determined by the allegations of the complaint against the insured, regardless of the falsity of any of these allegations. Equity Mutual Insurance Co. v. Southern Ice Co., 232 Ark. 41, 334 S.W.2d 688 (1960). Aetna, therefore, breached its contract, by failing to meet its obligation to defend Mary Margaret, since the complaint against her alleged a factual setting coming...