City of Wakefield v. Globe Indem. Co.

• Decision Date: 03 June 1929
• Docket Number: Jan. Term.,No. 50,50
• Citation: 225 N.W. 643,246 Mich. 645
• Parties: CITY OF WAKEFIELD v. GLOBE INDEMNITY CO. et al.
• Court: Michigan Supreme Court

246 Mich. 645

225 N.W. 643

CITY OF WAKEFIELD

v.GLOBE INDEMNITY CO. et al.

No. 50, Jan. Term.

Supreme Court of Michigan.

June 3, 1929.

Error to Circuit Court, Gogebic County; George O. Driscoll, Judge.

Action by the City of Wakefield against the Globe Indemnity Company and others. Judgment for plaintiff, and defendants bring error. Reversed, and new trial granted.

Argued before the Entire Bench.

Fead, McDonald, and Potter, JJ., dissenting in part. M. J. Kennedy, of Ishpeming, for appellants.

Harry K. Bay, of Ironwood (Charles M. Humphrey, of Ironwood, of counsel), for appellee.

FEAD, J.

Plaintiff, city of Wakefield, operates an automobile bus line. Defendants carried its liability insurance, under joint policy, in the sum of $10,000 for damages to any one person. Frank Borski was injured by one of the city vehicles, brought suit for damages, defendants assumed the defense, with the city attorney co-operating and attorney of record, and, on trial, Borski recovered judgment for over $15,000, which was affirmed by this court. Borski v. City of Wakefield, 239 Mich. 656, 215 N. W. 19. The city having paid the judgment, defendants reimbursed it in the sum of $10,000 and costs. This suit was brought in tort to recover the balance of the judgment on the claims of (a) negligent defense of the Borski suit by defendants; (b) their failure to exercise reasonable care to effect a compromise of Borski's claim; and (c) their bad faith in refusing settlement.

The claim of negligent defense is that defendants failed to make the point at the Borski trial that the operation of a bus line was ultra vires of the city, and therefore it was not liable for the injury. Before the trial, counsel for defendants and for the city discussed the matter at length with the city officials. Counsel for defendants wanted to raise the point, and drafted an appropriate amendment to the notice under the plea. The city officials objected to making the defense, and acquiesced in its abandonment. We agree with the circuit judge that the plaintiff is estopped from now claiming negligent defense in this respect.

Before the trial, several propositions of settlement were suggested to defendants. During the trial, counsel for Borski, for the city, and for defendants reached an agreement to compromise the suit for $4,325, subject to defendants' approval. Defendants refused to settle. The other claims of liability arise out of such refusal.

The policy required defendants to defend all suits brought against the insured to recover damages under it, ‘unless the insurers shall elect to effect settlement thereof,’ and contained the clause: ‘The insurers shall have the exclusive right to contest or settle any of said suits or claims. The assured shall not interfere in any way respecting any negotiations for the settlement of any claim or suit, nor in the conduct of any legal proceedings, but shall, at all times, at the request of the insurers, render to them all possible co-operation and assistance. The assured shall not voluntarily admit or assume any liability for an accident, nor incur any expense other than for immediate surgical relief, nor settle any claim, except at the assured's own cost.'

The issues are of first impression in this state, but they have been considered and exhaustively discussed in numerous cases in other jurisidictions. The authorities are collected in United States Casualty Co. v. Johnston Drilling Co., 161 Ark. 158, 255 S. W. 890,34 A. L. R. 730;Douglas v. United States Fidelity & Guaranty Co., 81 N. H. 371, 127 A. 708, 37 A. L. R. 1477;Fidelity & Casualty Co. of New York v. Stewart Dry Goods Co., 208 Ky. 429, 271 S. W. 444,43 A. L. R. 326, and notes.

The courts seem to be unanimous in the opinion, as expressed by direct ruling, recognition, or assumption, that the insurer is liable to the insured for an excess of judgment over the face of the policy when the insurer, having exclusive control of settlement, fraudulently or in bad faith refuses to compromise a claim for an amount within the policy limit. They are also unanimous that the instant form of policy contains no express or implied contract obligation of the insurer to compromise claims, and that an action in assumpsit or on the contract will not lie for the excess of judgment over policy limit. Where the proposition is stated, the great weight of authority holds that the insurer has the option to compromise but no obligation to do so. The exclusive control of settlement in the insurer, however, applies only to the policy limit, as the insured may compromise his own possible liability in excess of that amount. General Accident, Fire & Life Assurance Corporation v. Louisville Home Telephone Co., 175 Ky. 96, 193 S. W. 1031, L. R. A. 1917D, 952;Pickett v. Fidelity & Casualty Co., 60 S. C. 477, 38 S. E. 160, 629.

In discussing the cases adverse to it, plaintiff's counsel stress the form of action as bearing upon liability. In many of the cases the form of action is not entirely clear. In Wisconsin Zine Co. v. Fidelity & Deposit Co. of Maryland, 162 Wis. 39, 155 N. W. 1081, Ann. Cas. 1918C, 399, it was in tort, and in Best Building Co. v. Employers' Liability Assurance Co., 247 N. Y. 451, 160 N. E. 911,Mendota Electric Co. v. New York Indemnity Co., 169 Minn. 377, 211 N. W. 317, and Wynnewood Lumber Co. v. Travelers' Insurance Co., 173 N. C. 269, 91 S. E. 946, it seems to have been. However, while the distinction between action in contract and in tort is emphasized in the Douglas Case, the other courts used general language in stating their conclusions as to liability, and in nearly all cases without discussion of the form of action.

Plaintiff's theory, following Douglas v. United States Fidelity & Guaranty Co., 81 N. H. 371, 127 A. 708, 37 A. L. R. 1477, and Attleboro Mfg. Co. v. Frankfort Marine, Accident & Plate Glass Insurance Co. (C. C. A.) 240 F. 573, may be expressed in a quotation from a note to the Attleboro Case, as reported in 17 N. C. C. A. 1068: ‘In the event the indemnitor elects to resist such a claim of liability, or to effect a settlement thereof on such terms as it can get, there arises a new, implied contract, supplementing if not superseding the policy of indemnity, and coincident therewith, a self-imposed duty to exercise due care and good faith.'

And one from plaintiff's brief: ‘This case also proceeds upon the theory that anyone who assumes to perform a service for another is by the common law duty bound to exercise due case and diligence in the performance thereof, especially where the party for whom the service is being performed is precluded from doing anything in his own behalf for his own protection during the performance thereof.'

The circuit court submitted the cause to the jury on the ground of ordinary negligence, and plaintiff had verdict and judgment.

Plaintiff's theory overlooks the purport and purpose of the policy provisions regarding control of settlements. The policy amount constitutes a dead line of contractual power, obligation, and duty. The insured pays for protection to that amount only, and the insurer has no obligation to indemnify him in a greater sum. The insurer has no authority to bind insured by compromise in any amount above such limit nor to prevent his settling his own possible excess liability as he chooses. Within the policy limit, the insurer has no contract obligation to effect settlement, as the policy contains no promise that it will do so under any conditions or circumstances. Nor within such limit can the insured be injured by any compromise or failure to compromise, as liability to that amount must be paid by the insurer. It seems very plain that the exclusive power to control settlements within the amount of the policy is ceded to the insurer for its sole benefit, to save itself, as far as may be, on account of its engagement to insured. Because of its purpose, the power is to be used according to the judgment and discretion of the insurer, and therefore, in attempting exercise of the power, it is not performing, or assuming to perform, a legal duty to insured, either express or implied. Without such legal duty, the obligation to use due care in the exercise of the power cannot be imposed by law.

Recognizing the soundness of the weight of authority in this respect, some of the commentators have suggested that the insurer should not be held liable even for bad faith in refusing settlement, because the insured may fully protect himself by compromising his own possible liability over the policy amount. However, we think the rule adopted by the authorities should be followed in the interest of uniformity and may be sustained in principle. Prohibition against fraud or bad faith is imposed by law upon every legal relationship, is a part of every lawful grant of power, and it is not necessary to contract for it. The power to control settlements having been granted to insurer for the purpose of its own protection under the policy, it is bound to use the power in good faith for that purpose.

The insured has no obligation to compromise his own possible liability, but may rest upon the policy, the promise to indemnify in a certain amount, the duty of insurer to conduct the defense and to use its discretionary power of settlement in good faith. The use of the power in bad faith, for improper motives, or for other purpose than that for which it was granted, would constitute a fraud upon insured and be actionable if injury results to him therefrom. See Chambers v. Chambers, 207 Mich. 129, 173 N. W. 367.

The practical difficulties and effect of the rule suggested by plaintiff are apparent. They have been set out at some length in Best Building Co. v. Employers' Liability Assurance Co., 247 N. Y. 451, 160 N. E. 911, and need not be repeated.

We think the rule adopted by the great weight of authority is in harmony with the contract of the parties and should be followed. Defendants are not liable to plaintiff for...