Carter v. Pioneer Mut. Cas. Co.

• Decision Date: 08 July 1981
• Docket Number: No. 80-1259,80-1259
• Citation: 21 O.O.3d 92,423 N.E.2d 188,67 Ohio St.2d 146
• Parties: , 21 O.O.3d 92 CARTER et al., Appellants, v. PIONEER MUTUAL CASUALTY CO., Appellee.
• Court: Ohio Supreme Court

Page 146

67 Ohio St.2d 146

423 N.E.2d 188, 21 O.O.3d 92

CARTER et al., Appellants, v. PIONEER MUTUAL CASUALTY CO., Appellee.

No. 80-1259.

Supreme Court of Ohio.

July 8, 1981.

Syllabus by the Court

1. An entry of judgment against an insured's estate in excess of the insurance policy limits is sufficient damage alone to sustain a recovery from the insurer if it is adjudicated that there was a breach of duty by the insurer in defending the insured's estate.

2. Upon the adjudication of an insurer's bad faith in defending an insured's estate, an excess judgment may be recovered from the insurer despite the insolvency of the estate.

Jack Pelfrey and his spouse, Nancy Pelfrey, had a comprehensive family insurance policy covering a 1959 automobile with the Pioneer Mutual Casualty Company (now Personal Service Insurance Co.), appellee herein. The insurance policy provided that appellee would pay all sums which the insureds became legally obligated to pay up to limits of $10,000 for any injury to one person and a maximum of $20,000 for each accident.

Jack Pelfrey was an employee of Olan Mills, Inc., and, as such, was covered under an insurance policy with Home Indemnity Company while driving his own automobile in the scope of his employment.

On January 15, 1969, Albert A. Carter and his spouse, Nora A. Carter, hereinafter appellants, filed suit in the Court of Common Pleas of Clark County against Nancy Pelfrey, administratrix of the estate of Jack Pelfrey, and Olan Mills, Inc., alleging that Jack Pelfrey, while in the scope of his employment, negligently operated his automobile, causing a collision with their car, resulting in injuries to appellants. The accident resulted in the death of Jack Pelfrey, whose estate is insolvent.

Prior to trial, demand was made upon the named defendants up to the policy limits of both insurance companies, in the amount of $48,500 for full settlement of the case. Home Indemnity Company, on behalf of Olan Mills, Inc., made a settlement of $28,500 but allowed appellants to proceed with their case against the estate of Jack Pelfrey.

The matter proceeded to trial against the Pelfrey estate and resulted in a verdict of an aggregate sum of $75,821 in favor of appellants. The $28,500 paid by Home Indemnity on behalf of Olan Mills, Inc., was apportioned against the verdict, and the court entered judgment in favor of appellants for an aggregate sum of $46,321.

Thereafter, appellee paid its $20,000 limit to appellants, leaving the estate of Jack Pelfrey an unsatisfied balance due to appellants of $26,321.

Nancy Pelfrey, administratrix of the Pelfrey estate, assigned any possible cause of action the estate may have against her own insurance company, the appellee, to appellants.

In consideration for this assignment, appellants paid Nancy Pelfrey $1,000 and discharged the Pelfreys from all personal liability to pay the unsatisfied judgments still owing to the appellants.

On April 13, 1972, appellants filed a complaint in the Court of Common Pleas of Cuyahoga County against the appellee, alleging, in essence, that appellee acted in bad faith in conducting the defense of the Pelfreys in the foregoing negligence suit, in violation of its contractual obligation and in disregard of the rights and interests of the Pelfreys. The complaint prays that the Pelfreys be awarded $46,321 and other equitable remedies.

Appellants filed a motion for summary judgment on the issue of liability alone. The court granted the motion, determining that appellee had, as a matter of law, acted in "bad faith" in defending the Pelfreys in their case. ¹

The cause went to trial on the sole issue of damages. The court rendered final judgment for the appellants in an aggregate sum of approximately $33,338, as well as $7,800 for attorney fees.

The Court of Appeals reversed the trial court and entered final judgment in favor of appellee on the rationale that an excess judgment may not be recovered by an insolvent estate since an insolvent estate cannot be damaged.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Mansour, Gavin, Gerlack & Manos Co., L.P.A., and Richard J. McGraw, Cleveland, for appellants.

William Croxton Ailes, North Canton, for appellee.

LOCHER, Justice.

Appellants, in their sole proposition of law, assert, in essence, that an excess judgment may be recovered from an insurer by an insured's estate or its assignee for "bad faith" despite the insolvency of the estate.

We find merit in this contention.

Traditionally, there have been two schools of thought concerning the imposition of liability upon an insurer for failing to exercise good faith which results in an excess judgment against the insured.

An increasing majority of jurisdictions have adopted the "judgment rule," which advocates the reasoning that an entry of judgment in excess alone is sufficient damage to sustain a recovery from an insurer for its breach of duty to act in good faith in defending the insured's case. ² Alabama Farm Bureau Mut. Cas. Ins. Co. v. Dalrymple (1959), 270 Ala. 119, 116 So.2d 924; Brown v. Guarantee Ins. Co. (1957), 155 Cal.App.2d 679, 319 P.2d 69; American Fire & Cas. Co. v. Davis (Fla.App.1962), 146 So.2d 615; Wolfberg v. Prudence Mut. Cas. Co. (1968), 98 Ill.App.2d 190, 240 N.E.2d 176; Henke v. Iowa Home Mut. Cas. Co. (1959), 250 Iowa 1123, 97 N.W.2d 168; Jenkins v. General Acci. Fire & Life Assur. Corp., Ltd. (1965), 349 Mass. 699, 212 N.E.2d 464; Lange v. Fidelity & Cas. Co. (1971), 290 Minn. 61, 185 N.W.2d 881; Dumas v. State Farm Mut. Auto. Ins. Co. (1971), 111 N.H. 43, 274 A.2d 781; Henegan v. Merchants Mut. Ins. Co. (1968), 31 App.Div.2d 12, 294 N.Y.S.2d 547; Gray v. Nationwide Mut. Ins. Co. (1966), 422 Pa. 500, 223 A.2d 8; Southern Fire & Cas. Co. v. Norris (1952), 35 Tenn.App. 657, 250 S.W.2d 785; Hernandez v. Great American Ins. Co. (Tex.1971), 464 S.W.2d 91; Ammerman v. Farmers Ins. Exchange (1969), 22 Utah 2d 187, 450 P.2d 460; Harris v. Standard Acci. & Ins. Co. (D.C.S.D.N.Y., 1961), 191 F.Supp. 538; Smoot v. State Farm Mut. Auto. Ins. Co. (C.A. 5, 1962), 299 F.2d 525; Anderson v. St. Paul Mercury Indem. Co. (C.A. 7, 1965), 340 F.2d 406; Gaskill v. Preferred Risk Mut. Ins. Co. (D.C.Md.1966), 251 F.Supp. 66.

A living insured with no assets suffers injury when an excess judgment is obtained against him because such a judgment will potentially impair his credit, place a cloud on the title to his exempt estate, impair his ability to successfully apply for loans, diminish his reputation and future prospects and the like. See Crabb v. National Indemnity Co. (1973), 87 S.D. 222, 205 N.W.2d 633; Anderson v. St. Paul Mercury Indem. Co., supra; and Lange v. Fidelity & Casualty Co., supra.

A solvent estate may also pursue an excess judgment against the insurer since the interests of the estate are involved and a full and fair recovery enables the fiduciary of the estate to distribute assets free from the claim of the holder of the excess judgment. Henke v. Iowa Home Mut. Casualty Co., supra ; and Wolfberg v. Prudence Mut. Cas. Co., supra.

A decreasing minority of jurisdictions adopt the "payment rule," which advocates the reasoning that, if an insured did not and cannot pay out any money in satisfaction of an excess judgment, the insured was not harmed, and, therefore, the insurer is not to be held responsible for its bad faith in defending the insured's case.

We adopt the rationale of a majority of jurisdictions, which espouse the "judgment rule." ³

The seminal case law authority in this area is Wolfberg v. Prudence Mut. Cas. Co., supra (98 Ill.App.2d 190, 240 N.E.2d 176). The court, in Wolfberg, succinctly gave the rationale for the adoption of the "judgment rule," when it stated, at page 197, 240 N.E.2d 176:

"We are persuaded that the majority view is the sounder one both in justice and logic. The very fact of the entry of judgment itself constitutes damage and harm sufficient to permit recovery. The damage to the estate is the creation of liability for the judgments. The rule of damages is that incurrence is equivalent to outlay.

" * * *

"Were payment or showing of ability to pay the rule, encouragement would be given to an insurer with an insolvent insured to unreasonably refuse to settle. Such a course would impair the use of insurance for the poor man. Further, the fullness or the emptiness of an insured's purse would be an irrelevant and poor measure of liability and performance of duty by the insurer under his contract."

The Court of Appeals, which adopted the "judgment rule," carved a sole exception to the foregoing principle. The court formulated a hybrid exception to the "judgment rule" which sounds much akin to the rationale of the "payment rule." It reasoned that there is no damage to the insured or his estate either now or in the future, because the estate is insolvent, and, therefore, there is no present or future detriment to the estate. Thus, the court concluded that the insurer, appellee is relieved from paying the excess judgment even though it has been adjudicated to have acted in bad faith which resulted in the excess judgment rendered against the estate of Jack Pelfrey.

Because of theoretical and practical considerations, we find no reason to carve this exception.

Theoretically, it would be a windfall to the insurer and "such a course would impair the use of insurance for the poor man." See Wolfber...