Centennial Ins. Co. v. Liberty Mut. Ins. Co.

• Decision Date: 21 May 1980
• Docket Number: No. 79-652,79-652
• Citation: 62 Ohio St.2d 221,16 O.O.3d 251,404 N.E.2d 759
• Parties: , 16 O.O.3d 251 CENTENNIAL INSURANCE CO., Appellant, v. LIBERTY MUTUAL INSURANCE CO., Appellee.
• Court: Ohio Supreme Court

Page 221

62 Ohio St.2d 221

404 N.E.2d 759, 16 O.O.3d 251

CENTENNIAL INSURANCE CO., Appellant, v. LIBERTY MUTUAL INSURANCE CO., Appellee.

No. 79-652.

Supreme Court of Ohio.

May 21, 1980.

Syllabus by the Court

An excess insurer is subrogated to the insured's rights against a primary insurer and may maintain an action for breach of the primary carrier's good faith duty to settle and defend. To prevail in such a suit the excess insurer must demonstrate the primary insurer's failure to exercise good faith in line with our case law dealing with the subject.

In January 1971, Norwood L. McAllister, was fatally injured at a construction site operated by the Associated Estates Corporation, in Euclid, Ohio. The death resulted from a load of dry wall falling on the cab of a truck in which McAllister was sitting. Defendant-appellee, Liberty Mutual Insurance Company (hereinafter "Liberty"), was the primary insurer of Associated Estates. Its policy limit was $300,000 per occurrence. Associated Estates also had an excess liability policy issued by plaintiff-appellant, Centennial Insurance Company (hereinafter "Centennial"), with a limit of $5,000,000 per occurrence.

In January 1973, McAllister's widow, Joan L. McAllister, filed suit in the Court of Common Pleas of Cuyahoga County alleging that her husband's death was caused by the negligence of Associated Estates and other defendants, seeking damages against the defendants in the amount of $880,000. The parties were unable to reach a settlement and the case was submitted to a jury, which returned a verdict of $795,000 in plaintiff's favor. While a motion for a new trial was pending, the plaintiff agreed to a reduction of $95,000 leaving $700,000 to be paid by Liberty and Centennial, thus concluding that case, but spawning this one.

In May, 1974, Centennial filed this action in the Court of Common Pleas alleging bad faith by Liberty in failing to settle the McAllister case within Liberty's policy limits prior to trial. The case went to trial in September 1976, and concluded with a jury verdict for Centennial in the amount of $401,974. ¹

The Court of Appeals reversed this jury verdict finding that the trial court erred in denying Liberty's motions for a directed verdict. The court concluded that as a matter of law the trial court should have rendered a judgment for Liberty.

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 appellant.

Baker & Hostetler and Albert J. Knopp, Cleveland, for appellee.

PAUL W. BROWN, Justice.

It is settled law in this state that an insurer owes a duty to exercise good faith in defending and settling claims against the insured and that a breach of that duty will give rise to a cause of action by the insured. Hart v. Republic Mut. Ins. Co. (1949), 152 Ohio St. 185, 87 N.E.2d 347; Slater v. Motorists Mut. Ins. Co. (1962), 174 Ohio St. 148, 187 N.E.2d 45. The instant cause, however, presents a situation in which an excess insurer seeks recovery from a primary insurer. The great weight of authority approves such a cause of action, extending an insurer's duty to exercise good faith to include an excess insurer. Home Ins. Co. v. Royal Indemnity Co. (1972), 68 Misc.2d 737, 327 N.Y.S.2d 745, affirmed 39 A.D.2d 678, 332 N.Y.S.2d 1003; Allstate Ins. Co. v. Reserve Ins. Co. (1976), 116 N.H. 806, 373 A.2d 339; American Fidelity & Cas. Co. v. All American Bus Lines, Inc. (C.A.10, 1951), 190 F.2d 234, certiorari denied, 342 U.S. 851, 72 S.Ct. 79, 96 L.Ed. 642 (1951); Valentine v. Aetna Ins. Co. (C.A.9, 1977), 564 F.2d 292. See, generally, Keeton, Insurance Law 513-514, Section 7.8(d); Bloom, Recovery against Primary Insurer by Excess Carrier for Bad Faith or Negligent Failure to Settle, 36 Ins.Counsel J. 235.

In analyzing this type of situation these courts have set out the reasons for allowing such a cause of action by the excess insurer. One court has noted that "* * * (w)hen there is no excess insurer, the insured becomes his own excess insurer, and his single primary insurer owes him a duty of good faith in protecting him from an excess judgment and personal liability. If the insured purchases excess coverage, he in effect substitutes an excess insurer for himself. It follows that the excess insurer should assume the rights as well as the obligations of the insured in that position." Continental Cas. Co. v. Reserve Ins. Co. (1976), 307 Minn. 5, 8-9, 238 N.W.2d 862. Accord Portland General Electric Co. v. Pacific Indemnity Co. (C.A.9, 1978), 579 F.2d 514.

Another court in reviewing this type of cause of action has stated that:

"Moreover, strong equitable and economic considerations also compel this result in the present case. The primary carrier's duty arises by way of a contract with the insured, and this duty is not reduced merely because of another contract between the insured and its excess insurer.

"An insurance company's duty to act in good faith in settling claims within its policy limits is well established and is reflected in its premiums. That an excess insurer may recover from the primary for a breach of duty does not increase the duty or the liability of the primary." Peter v. Travelers Ins. Co. (C.D.Cal.1974), 375 F.Supp. 1347, 1350. Accord Estate of Penn v. Amalgamated General Agencies (1977), 148 N.J.Super. 419, 372 A.2d 1124; Valentine v. Aetna Ins. Co., supra (564 F.2d 292).

The fear has also been expressed that "(i)f the primary carrier is relieved of its duty to accept reasonable offers by the existence of excess insurance, it would put an additional financial liability on the excess carrier which would be reflected in increased premiums. It would also have the effect of reducing the incentive of a primary insurer to settle when the settlement offer is near or over its policy limits. This is contrary to the interests of the public and the insured in obtaining prompt and just settlement of claims." Peter v. Travelers Ins. Co., supra, at pages 1350-51. See, also, Northwestern Mut. Ins. Co. v. Farmers' Ins. Co. (1978), 76 Cal.App.3d 1031, 143 Cal.Rptr. 415.

In line with this authority and these policy considerations, we hold that an excess insurer is subrogated to the insured's rights against a primary insurer and may maintain an action for breach of the primary carrier's good faith duty to settle and defend. ² To prevail in such a suit the excess insurer must, however, demonstrate the primary insurer's failure to exercise good faith in line with our case law dealing with this subject. We have established in this context that:

"A lack of good faith is the equivalent of bad faith, and bad faith, although not susceptible of concrete definition, embraces more than bad judgment or negligence. It imports a dishonest purpose, moral obliquity, conscious wrongdoing, breach of a known duty through some ulterior motive or ill will partaking of the nature of fraud. It also embraces actual intent to mislead or deceive another." Slater v. Motorists Mut. Ins. Co., supra, 174 Ohio St. 148, 187 N.E.2d 45, paragraph two of the syllabus. Accord Wasserman v. Buckeye Union Cas. Co. (1972), 32 Ohio St.2d 69, 290 N.E.2d 837; Spitler v. State Auto Mut. (1980), 61 Ohio St.2d 242, 400 N.E.2d 889.

Centennial in the instant cause alleges Liberty's bad faith in two respects. First, it is claimed that Liberty was guilty of bad faith because of a wrongful refusal to negotiate. Secondly, it is alleged that Liberty acted improperly in requesting Centennial to contribute to a settlement, which was within Liberty's primary policy limits of $300,000.

The facts do not support appellant's first contention concerning bad faith. Liberty conducted a thorough investigation of the original claim, provided Centennial access to its files and regularly communicated with Centennial concerning the status of the proceedings. At a pre-trial conference prior to trial in the McAllister case intensive negotiations took place. Settlement demands dropped from $400,000 to...