Covill v. Phillips

• Decision Date: 26 June 1978
• Docket Number: Civ. A. No. 75-103-C2.
• Citation: 452 F. Supp. 224
• Parties: Lawrence B. COVILL and Jennie L. Covill, Plaintiffs, v. Kenneth N. PHILLIPS, Defendant, State Farm Mutual Automobile Insurance Company, Garnishee.
• Court: U.S. District Court — District of Kansas

452 F. Supp. 224

Lawrence B. COVILL and Jennie L. Covill, Plaintiffs, v. Kenneth N. PHILLIPS, Defendant, State Farm Mutual Automobile Insurance Company, Garnishee.

Civ. A. No. 75-103-C2.

United States District Court, Dist. Kansas.

March 27, 1978.

On Motion for Amendment June 26, 1978.

George W. Thomas, Kansas City, Kan., John C. Risjord, of Niewald, Risjord & Waldeck, Kansas City, Mo., for plaintiffs.

Willard L. Phillips and John J. Jurcyk, Jr., of McAnany, Van Cleave, & Phillips, Kansas City, Kan., for defendant.

Thomas E. Deacy, Jr. and Spencer J. Brown, of Deacy & Deacy, Kansas City, Mo., for garnishee.

MEMORANDUM AND ORDER

O'CONNOR, District Judge.

The instant garnishment action, in which the garnishor Lawrence B. Covill seeks to hold the State Farm Mutual Automobile Insurance Company liable for amounts in excess of the policy limits on the judgment rendered against its insured, Kenneth Phillips, in the principal action in this case, was tried to the court from September 27 to September 29, 1977. The evidence in this case raises close questions of fact and law, many of which have not been squarely addressed by the pertinent case law in the State of Kansas. After making an exhaustive review of the record in light of the applicable law, the court is now prepared to render its findings of fact and conclusions of law with reference to the instant controversy. The court's holding, briefly stated, is that State Farm is indeed liable for the excess judgment of $75,000 rendered against its insured.

In Kansas, an insurer's liability for a so-called "excess judgment" is controlled by Bollinger v. Nuss, 202 Kan. 326, 449 P.2d 502 (1969). Bollinger held that when a "standard-type liability policy" reserves to the insurer the right to make such investigation and settlement of any claim or suit as it deems expedient, the insurer in defending and settling claims against its insured must act not only in good faith but also without negligence. Breach of these duties of good faith and due care renders the insurer liable for the full amount of the insured's loss, even if that amount exceeds the policy limits in question. Bollinger made it clear that the presence of the requisite elements of due care and good faith must be determined on a case by case basis. The analytical framework supplied by Bollinger and its progeny, however, has suggested various practical guideposts by which the insurer's adherence to its legal obligations may be measured.

The duty of good faith envisions a standard of conduct much higher than a mere forbearance from malicious conduct toward the insured; it implies honesty, fair dealing, and adequate information. Bollinger, 202 Kan. at 341, 449 P.2d at 514. In the context of pretrial settlement negotiations, good faith first requires the insurer to communicate to the insured the results of any investigation indicating liability in excess of policy limits and any offers of settlement which have been made, so that he may take proper steps to protect his own interests. Bollinger, 202 Kan. at 339, 449 P.2d at 512. Second, good faith requires the insurance company, in determining whether to accept or reject an offer of compromise, to give equal consideration to its own interests and those of its insured. In other words, the insurer must treat the claim "as if it alone were liable for the entire amount." Bollinger, 202 Kan. at 337, 449 P.2d at 511. Third, good faith conduct by an insurer implies action "upon adequate information," Rector v. Husted, 214 Kan. 230, 519 P.2d 634 (1974), and presupposes a good faith analysis of information ascertainable by inquiry or investigation. Rider v. State Farm Mutual Automobile Insurance Company, 514 F.2d 780 (10th Cir. 1975). Fourth, good faith requires an insurer to honestly evaluate the value of an unlitigated claim based on its apparent merits or lack thereof, the possibility of liability being established, and the probable nature and extent of injuries to be proved. Bollinger, 202 Kan. at 341, 449 P.2d at 513. Good faith further compels an insurer to base any rejection of a compromise offer approaching the policy limits upon an honest belief that it can defeat the action or keep any possible judgment within the limits of the policy coverage. Brown v. Guarantee Insurance Company, 155 Cal.App.2d 679, 319 P.2d 69 (1958). Finally, at least in potential excess judgment cases where there is no reasonable question as to the liability of the insured, the duty of good faith may require an insurance company to make reasonable, timely efforts to initiate settlement negotiations. Rector, 214 Kan. at 241, 519 P.2d at 643. All of the above attributes of good faith, couched alternatively in terms of "due care," are concisely summarized in the statement that "the insurer must conduct itself with that degree of care which would be used by an ordinarily prudent person in the management of his own business, with no policy limits applicable to the claim." Bollinger, 202 Kan. at 338, 449 P.2d at 511; Bennett v. Conrady, 180 Kan. 485, 305 P.2d 823 (1957).

In Bollinger, the Kansas Supreme Court enumerated eight factors that should be considered in deciding whether an insurer's refusal or failure to settle constituted a breach of its duty of due care or good faith. Those factors are as follows:

1. The strength of the injured claimant's case on the issues of liability and damages;

2. Attempts by the insurer to induce the insured to contribute to a settlement;

3. Failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured;

4. The insurer's rejection of advice of its own attorney or agent;

5. The failure of the insurer to inform the insured of a compromise offer;

6. The amount of financial risk to which each party is exposed in the event of a refusal to settle;

7. The fault of the insured in inducing the insurer's rejection of the compromise offer by misleading it as to the facts; and

8. Any other factors tending to establish or negate bad faith on the part of the insurer.

Bollinger, 202 Kan. at 338, 449 P.2d at 512. These factors must of course be evaluated "as the case fairly appeared to the insurer and its authorized agents and attorneys during the time the case was under construction." Rector, 214 Kan. at 239, 519 P.2d at 641. An insurer will not be held liable for what in hindsight appears to be a "mere error of judgment." Bollinger, 202 Kan. at 341, 449 P.2d at 514.

I. FACTUAL BACKGROUND

The events culminating in the instant litigation may be briefly summarized as follows: On April 6, 1975, Larry Covill and his sister Jennie Covill were seriously injured when the automobile in which they were riding was struck by an automobile driven by Kenneth Phillips, a teenage driver whose car had failed to stop at a stop sign at a rural intersection. As a result of this accident, Larry suffered head injuries and was immediately hospitalized first at Lawrence Memorial Hospital and later at the University of Kansas Medical Center. Although he experienced generalized seizures shortly after admission to the hospital, he later appeared to be "doing very well" and was discharged on April 12, 1975. In the meantime, the Covill family had retained attorneys George Allen and John Risjord to represent Larry and Jennie. As early as April 10, 1975, four days after the accident and before Larry was released from the hospital, Allen began contacting the State Farm Mutual Automobile Insurance Company, the insurer of Kenneth Phillips, demanding divulgence of the policy limits and threatening to sue if such information was not immediately forthcoming. Meanwhile, State Farm had retained the Barber, Emerson, Six, Springer & Zinn law firm of Lawrence, Kansas, to investigate its insured's claim that the accident had resulted from a brake failure. During the course of this investigation of what it viewed as a probably valid defense, State Farm refused to either concede the liability of its insured or to reveal the policy limits of coverage. By May 12, 1975, however, it became apparent to State Farm that the alleged brake failure defense was either weak or non-existent. State Farm therefore immediately notified Allen and Risjord that the policy limits for bodily injury were $50,000 per person and that State Farm wished to commence settlement negotiations regarding the claims of Larry and Jennie Covill. Shortly after receipt of this information on May 21, 1975, Allen and Risjord filed a civil action in this court seeking $250,000 in damages for the injuries suffered by Larry Covill and $100,000 for those suffered by Jennie Covill.

Risjord's response to State Farm's settlement overture was set forth in a letter dated June 2, 1975, wherein he included a statement that Larry had suffered a severe relapse on May 30, 1975, and had been hospitalized in critical condition with stress ulcer, massive internal bleeding, severe pneumonia, and static seizures; an observation that State Farm had had sufficient opportunity to complete its investigation of Larry's claim; and a demand that State Farm tender $50,000, the policy limits on Larry's claim, by June 20, 1975. Risjord and Allen communicated this offer not only to State Farm but also on June 9, 1975, to Kenneth Phillips through his personal attorney Anne Grether. In view of Kenneth Phillips' youth and the lawsuit's claim for damages vastly in excess of the policy limits, Grether advised Kenneth and his parents to make written demand on State Farm for settlement within the policy limits. Dr. and Mrs. Phillips and Kenneth had a pre-existing appointment scheduled for June 10, 1975, with Gerald Rushfelt, who had been retained by State Farm to handle the defense of the Covill claims. When they met as scheduled, the Phillips family discussed at length with Rushfelt the potential for an excess verdict against Kenneth and executed and delivered the written demand suggested by Grether.

For reasons not disclosed...