Dumas v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 26 February 1971
• Docket Number: No. 6079,6079
• Citation: 111 N.H. 43,274 A.2d 781
• Parties: Charles J. DUMAS et al. v. STATE FARM MUTUAL AUTOMOBILE INSURANCE CO.
• Court: New Hampshire Supreme Court

Page 781

274 A.2d 781

111 N.H. 43

Charles J. DUMAS et al. v. STATE FARM MUTUAL AUTOMOBILE INSURANCE CO.

No. 6079.

Supreme Court of New Hampshire.

Feb. 26, 1971.

Burns, Bryant, Hinchey, Nadeau & Cox, Dover (Paul R. Cox, Dover, orally), for plaintiffs Charles J. Dumas and Pamela A. MacLean.

Wiggin, Nourie, Sundeen, Pingree & Bigg and John R. Falby, Jr., Manchester, for defendant.

Devine, Millimet, McDonough, Stahl & Branch, Manchester (Shane Devine, Manchester, orally), amicus curiae in behalf of American Insurance Assn., American Mutual Insurance Alliance, and National Assn. of Independent Insurers.

GRIFFITH, Justice.

The law governing actions against liability insurers for negligent failure to settle tort claims against their assureds was established here some twenty-five years ago in the cases of Dumas v. Hartford Acc. & Indem. Company, 92 N.H. 140, 26 A.2d 361 (1942) and Dumas v. Hartford Acc. & Ind. Co., 94 N.H. 484, 56 A.2d 57 (1947). In the present case, with a plaintiff coincidentally named Dumas, we are asked to reexamine certain features of the original Dumas rules.

Flynn, J. transferred this case prior to trial with certain questions presented by the pleadings and an agreed statement of facts. In addition defendant excepted to the trial court's granting of plaintiffs' motion for discovery.

On February 9, 1964 Dumas was involved in an automobile accident with plaintiff MacLean. MacLean brought suit in the United States District Court against Dumas for injuries sustained in the accident. A verdict for plaintiff MacLean in the amount of $25,000 was returned which was sustained on appeal. Dumas v. MacLean, 404 F.2d 1062 (1st Cir. 1968). Defendant State Farm insured Dumas in this accident with coverage limits of $10,000. Under the terms of this policy it handled the defense of the MacLean suit including full control over whether a settlement was to be made. It is agreed that the MacLean action could have been settled within the policy limits and that there remains due on the MacLean judgment, after payment of the limit of defendant's policy, in excess of $20,000 including interest and costs.

Dumas has assigned to plaintiff MacLean his rights to recover this excess amount from defendant. Dumas has alleged that he has individually sustained in addition to the damage of the excess judgment physical disability and injury to his credit reputation. It is agreed that Dumas has made no payment to MacLean on the excess judgment. Both plaintiffs allege in one count a right to recover for the defendant's negligent failure to settle the MacLean claim and in a second count that defendant is strictly liable for its failure to settle.

It is agreed that Dumas in this case has not paid the excess judgment. Dumas v. Hartford Acc. & Indem. Company, 92 N.H. 140, 141, 26 A.2d 361, 362 (1942) declared that the 'existence of an outstanding judgment, which may never be paid, is not a legal injury, for the essence of the injury in such case is pecuniary loss.' This rule has not gained general acceptance and the modern trend is to allow the action to be maintained by an insured who has not paid the excess judgment. 7A Appleman, Insurance Law and Practice § 4712, at 574 (1962); Annot., 40 A.L.R.2d 168, 190 s. 8 (1955); 27 U.Pitt.L.Rev. 726, 728 (1966).

A policy argument against our present rule is that it serves as a windfall to an insurer fortunate enough to have insured an insolvent. Schwartz v. Norwich Union Indem. Co., 212 Wis. 593, 250 N.W. 446 (1933); Gray v. Nationwide Mut. Ins. Co., 422 Pa. 500, 506, 223 A.2d 8, 10 (1966); Alabama Farm Bureau Mut. Ins. Co. v. Dalrymple, 270 Ala. 119, 116 So.2d 924 (1959). In any event the statement that an insured has not been damaged because he cannot pay the excess judgment is based upon the fallacy that damaged credit and financial ruin are not injuries. Smoot v. State Farm Mut. Auto. Ins. Co., 299 F.2d 525 (5th Cir. 1962).

A plaintiff in a personal injury action has never been required to pay or show that he is able to pay expenses incurred in order to recover them. 22 Am.Jur.2d Damages s. 170 (1965); 2 Harper and James, Torts s. 25.9 (1956); Annot., 25 A.L.R. 579, 597 (1923); Annot., 65 A.L.R.2d 1426, 1438, s. 8 (1959). See Clough v. Schwartz, 94 N.H. 138, 141, 48 A.2d 921, 923 (1946); Wemyss v. Wyoming Valley Paper Company, 86 N.H. 587, 593, 172 A. 438, 442 (1934). Under the 'collateral source' rule our court permits recovery of expenses incurred by a plaintiff which he will never have to pay since they have been paid from another source. Bell v Primeau, 104 N.H. 227, 183 A.2d 729 (1962). Accordingly we reject the rule of Dumas v. Hartford Acc. & Indem. Company, supra and hold that a plaintiff may maintain an action against an insurer for negligent failure to settle a case without prior payment of or proof of ability to pay the excess judgment.

Tort claims, with certain exceptions not germane to this case, have generally been held assignable in this jurisdiction as choses in action. Jordan v. Gillen, 44 N.H. 424 (1862); Stewart v. Lee, 70 N.H. 181, 46 A. 31 (1899); Saloshin v. Houle, 85 N.H. 126, 128, 155 A. 47, 49 (1931). The problem present in jurisdictions which hold only contract claims assignable does not exist here. See 6 Am.Jur.2d Assignments s. 28 (1963). Accordingly the assignment is valid without statutory authorization. Cf. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 328 P.2d 198 (1958); Annot., 12 A.L.R.3d 1158 (1967).

Plaintiffs' second count in the present case is based upon strict liability and thus directly challenges the rule of Dumas v. Hartford Acc. & Ind. Co., 94 N.H. 484, 56 A.2d 57 (1947) holding an insured liable only on proof of negligent failure to settle after considering the interests of both the insurer and insured.

The dilemma presented by the absolute control of trial and settlement vested in the insurer by the insurance contract and the conflicting interests of the insurer and insured has not been too well solved by the courts. Initially there were two approaches to the problem. Some courts held that the duty owed by the insurer in this situation was one of good faith. These courts held that the insurer was only liable to the insured when it acted with bad faith and was not held to a standard of due care. Johnson v. Hardware Mut. Cas. Co., 109 Vt. 481, 1 A.2d 817 (1938); Hart v. Republic Mut. Ins. Co., 152 Ohio St. 185, 87 N.E.2d 347 (1949). Our court adopted the negligence standard in Cavanaugh v. Gen. Acc. Fire & Life Assur. Corporation, 79 N.H. 186, 106 A. 604 (1919), restated it in Douglas v. United States Fidelity & Guaranty Company, 81 N.H. 371, 127 A. 708 (1924), and developed it to its present form in Dumas v. Hartford, Acc. & Ind. Co., supra.

Commentators have suggested that in practice there is little difference in result reached under the bad faith and negligence standards. See 7A Appleman, Insurance Law and Practice § 4712, at 576 (1962); Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv.L.Rev. 1136, 1140 (1954). In part this confusion has arisen from the difficulty courts have in defining 'bad faith' in these cases. Indeed some courts have gone to the extent of applying both standards (Southern Farm Bureau Cas. Ins. Co. v. Mitchell, 312 F.2d 485 (8th Cir. 1963); Knudsen v. Hartford Accident and Indem. Co., 26 Conn.Sup. 325, 222 A.2d 811 (1966); State Farm Mut. Auto. Ins. Co. v. White, 248 Md. 324, 236 A.2d 269 (1967)) and others have defined good faith in terms of negligence. Annot., 40 A.L.R.2d 168, 186 (1955).

The difficulty of devising an acceptable formula for charging an insurer for failure to settle has brought numerous suggestions that the Gordian knot be cut by holding insurers strictly liable for the excess judgments resulting. Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv.L.Rev. 1136, 1145 (1954); 60 Yale L.J. 1037, 1041-1042 (1951); 18 Stan.L.Rev. 475, 482-85 (1966); Comment, 48 Mich.L.Rev. 95, 102 (1949); Note, 13 U.Chi.L.Rev. 105, 109 (1945); Comment, 47 Neb.L.Rev. 705, 717 (1968). Dictum in Crisci v. Security Ins. Co., 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173 (1967) paid glowing tribute to the proposed rule of strict liability before reciting the court was not required to consider 'whether there might be countervailing considerations precluding adoption of the proposed rule,' since the evidence supported a verdict for insured under existing California law. Previously the proposal had been rejected by the courts whenever urged. Rumford Falls Paper Co. v. Fidelity & Cas. Co., 92 Me. 574, 43 A. 503 (1899); Kingan & Co. v. Maryland Cas. Co., 65 Ind.App. 301, 115 N.E. 348 (1917); Annot., 40 A.L.R.2d 168 (1955).

While we agree with the statement in the Crisci case, supra, 66 Cal.2d at 431, 58 Cal.Rptr. at 17, 426 P.2d at 177, that '(t)he proposed rule is a simple one to apply * * *' this can hardly be the decisive factor in its adoption. The strongest argument on the side of strict liability appears to be that since the assured's interests generally dictate settlement within the policy limits, the insurer having control of settlement should be held to assume the risks of its acts against the insured's interests. The insurer argues that this writes unlimited coverage into every policy that can be...