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

• Decision Date: 22 June 1998
• Docket Number: No. 24634.,24634.
• Court: West Virginia Supreme Court
• Parties: Michael R. ELMORE, Individually and as the Administrator of the Estate of Tamela Faith Elmore, and as Guardian of Andrew C. Elmore, a Minor, Plaintiff, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Allstate Insurance Company, Roberta Axton Paugh, and Annabell Hawkins, Defendants.

504 S.E.2d 893

202 W.Va. 430

Michael R. ELMORE, Individually and as the Administrator of the Estate of Tamela Faith Elmore, and as Guardian of Andrew C. Elmore, a Minor, Plaintiff, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Allstate Insurance Company, Roberta Axton Paugh, and Annabell Hawkins, Defendants.

No. 24634.

Supreme Court of Appeals of West Virginia.

Submitted April 28, 1998.

Decided June 22, 1998.

Paul J. Harris, Harris & Bush, Elkins, for Elmore.

Catherine D. Munster, James A. Varner, Gregory H. Schillace, McNeer, Highland & McMunn, Clarksburg, for State Farm & Paugh.

E. Kay Fuller, Dale A. Buck, Walter Jones, Martin & Seibert, Martinsburg, for Allstate & Hawkins.

MAYNARD, Justice:

We are called upon here to answer a certified question from the Circuit Court of Harrison County regarding the viability of a third-party common law bad faith insurance action. The certified question and the circuit court's answer are as follows:

Whether, under West Virginia law, there is a legally cognizable cause of action by a third-party claimant against an insurance carrier for common law breach of fiduciary duty and for common law breach of the implied covenant of good faith and fair dealing (common law bad faith).

Answer of the circuit court: Yes.

This certified question comes to us as the result of the circuit court's partial denial of the defendant's motion for judgment on the pleadings and for summary judgment. Questions pertaining to a ruling of the trial court on a motion for judgment on the pleadings are properly certifiable.¹ Also,

West Virginia Code, 58-5-2 (1967), allows for certification of a question arising from a denial of a motion for summary judgment. However, such certification will not be accepted unless there is a sufficiently precise and undisputed factual record on which the legal issues can be determined. Moreover, such legal issues must substantially control the case.

Syllabus Point 5, Bass v. Coltelli, 192 W.Va. 516, 453 S.E.2d 350 (1994). We have determined there is a sufficiently precise and undisputed factual record upon which the legal issues may be resolved and "such legal issues... substantially control the case." Id. The question before us, therefore, is properly certified under W.Va.Code § 58-5-2 (1967) and is within the jurisdiction of this Court.

I. FACTS

A sketch of the pertinent facts is as follows. On August 10, 1990, Chester Workman drove his vehicle across the center line of the roadway and collided with a vehicle operated by the plaintiff, Michael Elmore. The collision resulted in the deaths of the plaintiff's pregnant wife, Tamela Faith Elmore, and unborn child as well as injuries to the plaintiff and his three-year-old son, Andrew C. Elmore. At the time of this accident, Chester Workman was insured by defendant State Farm Mutual Automobile Insurance Company ("State Farm") under a liability insurance policy with limits of $100,000 per person and $300,000 per occurrence. Defendant Allstate Insurance Company ("Allstate") insured the plaintiff under a policy of underinsured motorist coverage.

Concerning the events which gave rise to the underlying action, the plaintiff alleges the following occurred. In the aftermath of the auto accident, Defendant Roberta Paugh, employed by State Farm as an insurance adjuster, contacted the plaintiff regarding his claims against Chester Workman. Paugh informed the plaintiff that he would not receive the entire $300,000 policy limit because $100,000 was being retained by State Farm to settle the claims of the passengers in the Workman vehicle.² Allstate instructed the plaintiff to first settle with State Farm before filing his claim for underinsured coverage with Allstate.

State Farm subsequently drafted releases for the disputed claims. At this time, the plaintiff informed State Farm that he desired to retain an attorney before executing the releases. Paugh, however, advised the plaintiff that there was no need to retain an attorney because he was receiving the maximum amount available to him under the policy, and if he hired an attorney, he would ultimately pay one third of his recovery in attorney fees. Consequently, the plaintiff, pro se, entered into a settlement and release with the estate of Chester Workman and State Farm in the amount of $200,000. Unknown to the plaintiff at this time, however, State Farm had paid only $57,500 to the occupants of the Workman vehicle.³

The plaintiff subsequently contacted Allstate concerning his underinsurance policy. Allstate, through its agent Annabelle Hawkins, also a defendant in the underlying claim, repeatedly informed the plaintiff that she was in contact with her superiors regarding his claim. For close to two years, Allstate refused to either admit or deny the plaintiff's claim for underinsured policy coverage.⁴

As a result, the plaintiff retained an attorney and in August 1992 filed suit against the Estate of Chester Workman, State Farm and Allstate in the Circuit Court of Randolph County. At this time, Allstate asserted that it was denying the plaintiff's underinsurance claim on the basis that the limits of the State Farm policy were not exhausted and that the plaintiff had failed to preserve Allstate's subrogation rights. By agreement, State Farm rescinded the releases formerly executed by the plaintiff and paid the remaining $42,500 available under Workman's liability policy.

The plaintiff instituted the underlying action in the Circuit Court of Harrison County on December 2, 1996 against State Farm, Allstate, Paugh and Hawkins. State Farm moved to dismiss, which motion was granted in part and denied in part. Relevant to our purposes, the complaint alleges that State Farm breached its fiduciary duty and an implied covenant of good faith and fair dealing owed to the plaintiff, a third-party claimant. The trial court denied State Farm's motion to dismiss these allegations but certified the question as to their legal viability. This Court granted the Petition for Docketing of Certified Question. All remaining counts of the complaint relating to State Farm have been dismissed and are not the subject of this certified question. Also, the remaining counts against Allstate have not been dismissed but are pending below and are not involved in the certified question.

II. STANDARD OF REVIEW

"The appellate standard of review of questions of law answered and certified by a circuit court is de novo." Syllabus Point 1, Gallapoo v. Wal-Mart Stores, Inc., 197 W.Va. 172, 475 S.E.2d 172 (1996).

III. DISCUSSION

We are asked to decide:

Whether, under West Virginia law, there is a legally cognizable cause of action by a third-party claimant against an insurance carrier for common law breach of fiduciary duty and for common law breach of the implied covenant of good faith and fair dealing (common law bad faith).

Prior to addressing the plaintiff's precise arguments based on the specific facts of this case, we will first consider whether there is a general third-party common law bad faith insurance claim under our law.

A. Third-Party Common Law Bad Faith Claim

This Court recognized a common law duty of good faith and fair dealing running from an insurer to its insured, a first-party claimant in a property damage case, in Hayseeds, Inc. v. State Farm Fire & Cas., 177 W.Va. 323, 352 S.E.2d 73 (1986). We articulated the applicable rule in Syllabus Point 1:

Whenever a policyholder substantially prevails in a property damage suit against its insurer, the insurer is liable for: (1) the insured's reasonable attorneys' fees in vindicating its claim; (2) the insured's damages for net economic loss caused by the delay in settlement, and damages for aggravation and inconvenience.

This rule is based on the fact that, "when an insured purchases a contract of insurance, he buys insurance—not a lot of vexatious, timeconsuming, expensive litigation with his insurer." Hayseeds, 177 W.Va. at 329, 352 S.E.2d at 79. Because a Hayseeds type action is grounded on the existence of a contract between an insurer and its insured and not the insurer's motives in denying a property damage claim,

we consider it of little importance whether an insurer contests an insured's claim in good or bad faith. In either case, the insured is out his consequential damages and attorney's fees. To impose upon the insured the cost of compelling his insurer to honor its contractual obligation is effectively to deny him the benefit of his bargain.

Hayseeds, 177 W.Va. at 329, 352 S.E.2d at 79-80.

In Shamblin v. Nationwide Mut. Ins. Co., 183 W.Va. 585, 396 S.E.2d 766 (1990), this Court acknowledged the insurer's duty of good faith and fair dealing to an insured who is a tortfeasor. In that case, the insured brought an action against his insurer for failure to settle a claim in the underlying litigation within policy limits. In Syllabus Points 3 and 4, the Court set forth the following rule:

3. It will be the insurer's burden to prove by clear and convincing evidence that it attempted in good faith to negotiate a settlement, that any failure to enter into a settlement where the opportunity to do so existed was based on reasonable and substantial grounds, and that it accorded the interests and rights of the insured at least as great a respect as its own.

4. In assessing whether an insurer is liable to its insured for personal liability in excess of policy limits, the proper test to be applied is whether the reasonably prudent insurer would have refused to settle within policy limits under the facts and circumstances, bearing in mind always its duty of good faith and fair dealing with the insured. Further, in determining whether the efforts of the insurer to reach settlement and to secure a release for its insured as to personal liability are reasonable, the trial court should consider whether there was appropriate investigation and evaluation of the claim based upon objective and cogent evidence; whether the insurer had a...