Freeman v. Schmidt Real Estate & Ins., Inc., 84-1227

• Decision Date: 25 March 1985
• Docket Number: No. 84-1227,84-1227
• Citation: 755 F.2d 135
• Parties: Charlie G. FREEMAN, Appellant, v. SCHMIDT REAL ESTATE & INSURANCE, INC., Niels R. Schmidt, and AID Insurance Company, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 135

755 F.2d 135

Charlie G. FREEMAN, Appellant, v. SCHMIDT REAL ESTATE & INSURANCE, INC., Niels R. Schmidt, and AID Insurance Company, Appellees.

No. 84-1227.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 9, 1984.

Decided Feb. 20, 1985.

Rehearing Denied March 25, 1985.

Simmons, Perrine, Albright & Ellwood, James R. Snyder, Gregory M. Lederer, Cedar Rapids, Iowa, for appellees Schmidt Real Estate & Ins., Inc.

Crawford, Sullivan, Read & Roemerman, James W. Crawford, Thomas B. Read, Cedar Rapids, Iowa, for appellee AID Ins. Co.

Max E. Kirk, Ball, Kirk, Holm & Mardini, P.C., Waterloo, Iowa, for appellant.

Before HEANEY, Circuit Judge, HENLEY, Senior Circuit Judge, and JOHN R. GIBSON, Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

Charlie G. Freeman appeals from a summary judgment entered against him in his action against Schmidt Real Estate & Insurance, Inc., Niels R. Schmidt, and AID Insurance Company for their negligent failure to procure liability insurance for Russell K. Catron. Freeman and Catron were involved in an automobile collision, and in settlement of the resulting litigation, Catron confessed judgment and assigned his rights against the agent, agency and insurance company to Freeman in exchange for Freeman's promise not to execute on the judgment. Freeman then brought this suit alleging both the assigned claim that the agent and insurer had breached their duty to Catron to procure insurance and a direct claim that those same parties had breached an independent duty to him in failing to meet Catron's request. The magistrate ¹ rejected the existence of such an independent cause of action and also concluded that Freeman, because of the agreement not to execute and the "indemnity nature" of insurance generally, gained no enforceable rights through the assignment from Catron. We affirm.

Catron in the fall of 1978 had had a conversation with Niels Schmidt in which Schmidt allegedly agreed on behalf of his agency and AID Insurance Company to procure a $300,000 automobile liability policy protecting Catron from losses resulting from the use of his vehicles. On November 16, 1978, a vehicle owned by Catron and operated by Mrs. Catron was involved in a collision in which Charlie Freeman was injured. Freeman brought suit against the Catrons, invoking federal diversity jurisdiction. AID defended the action under a previously issued, undisputed $50,000 liability policy, with a reservation of rights denying coverage in excess of that amount. The case was settled on the following terms:

1. The Catrons confessed judgment for $350,000.00 and costs,

2. Freeman agreed not to execute against the Catrons on any amount of the judgment in excess of $50,000.00,

3. [AID paid its $50,000.00 liability limits to Freeman], and

4. [T]he Catrons assigned to Freeman their cause of action against the Schmidt agency and any other necessary person or entity for the agency's failure to obtain a $300,000.00 policy that would have covered the liability asserted against them by Freeman.

Freeman v. Schmidt Real Estate & Insurance, Inc., No. C 82-78, slip op. at 3 (N.D.Iowa Feb. 2, 1984).

Thereafter, Freeman brought this action alleging as the Catrons' assignee that Schmidt, the agency, and AID (hereafter "the insurers") were negligent and breached an oral contract in failing to obtain the additional liability insurance policy in the amount of $300,000. Freeman further alleged that the insurers' failure constituted a negligent breach of a duty owed directly to him as the victim of an automobile collision who would foreseeably be harmed by the Catrons' lack of coverage.

The magistrate granted summary judgment for the insurers. While observing that no Iowa case (the parties agree Iowa law controls) was directly on point, he went on to state:

It is equally clear that an insurance contract is basically a contract of indemnity. Hence, since the Catrons never became legally obligated to make any payments to plaintiff by virtue of the covenant not to execute they would have been entitled to nothing under the policy and hence have suffered no damage. Accordingly, plaintiff received no enforceable rights from them and the fact that the underlying obligation was not extinguished is irrelevant.

Freeman, slip op. at 6. The magistrate also ruled that under Iowa law potential future victims of possible automobile accidents do not constitute a discernible class as to whom a tortfeasor whose duty is created by contract may be liable despite the lack of privity.

In diversity cases we ordinarily accord substantial weight to the decisions of experienced district judges on questions of local law which have not yet been treated by state courts. Keltner v. Ford Motor Co., 748 F.2d 1265, 1267 (8th Cir.1984); Kansas State Bank v. Citizens Bank, 737 F.2d 1490, 1496 (8th Cir.1984). We have earlier stated that bankruptcy judges' conclusions are entitled to some deference as to questions of purely local law, Grenz Super Valu v. Fix, 566 F.2d 614, 615 (8th Cir.1977) (per curiam), and we feel no hesitation in considering similarly that weight also should be given to comparable decisions of magistrates. The magistrate's order here carefully analyzes the applicable law, and our research reveals no relevant precedents not fully examined by him. See Schuster v. U.S. News & World Report, Inc., 602 F.2d 850, 854 (8th Cir.1979). We cannot conclude that the magistrate's prediction of Iowa law is erroneous.

I.

As the magistrate recognized, states differ as to whether an insurer may be liable to the injured party when the insured before judgment is protected by an agreement not to execute. Cases reaching the result urged by Freeman basically follow one of two rationales.

First, under the typical liability insurance policy, an insurer must reimburse the insured only as to amounts which the insured "shall become legally obligated to pay as damages." A covenant not to execute, some courts hold, is merely a contract, and not a release, such that the underlying tort liability remains and a breach of contract action lies if the injured party seeks to collect his judgment. Thus, the tortfeasor is still "legally obligated" to the injured party, and the insurer still must make good on its contractual promise to pay. State Farm Mutual Automobile Insurance Co. v. Paynter, 122 Ariz. 198, 593 P.2d 948, 953 (Ct.App.1979); Globe Indemnity Co. v. Blomfield, 115 Ariz. 5, 562 P.2d 1372, 1375 (Ct.App.1977); cf. Critz v. Farmers Insurance Group, 230 Cal.App.2d 788, 41 Cal.Rptr. 401, 410 (1964) (agreement holding tortfeasor harmless as to judgment in excess of his insurance coverage doesn't foreclose suit against insurer for bad-faith failure to settle). An uninsured party would then be injured by the agent's negligence in failing to procure a policy because he would have the outstanding "liability" against which he sought to insure. ²

The policy rationale used by other states reaching the result urged by Freeman focuses primarily on the right of the insured to protect himself from bad faith conduct of his insurer. For example, the Nebraska Supreme Court has held that an insured, and thus the insurer, is "legally obligated to pay" within the meaning of the policy despite an agreement not to execute when the insured enters into such an agreement to protect himself from the insurer's denial of coverage and refusal to defend under the policy. Metcalf v. Hartford Accident & Indemnity Co., 176 Neb. 468, 126 N.W.2d 471 (1964). The Nebraska court stressed that the insurer had "repudiated its obligation" to the insured, id., 126 N.W.2d at 476, and some element of misconduct by the insurer generally has been present in the cases in which courts have followed Metcalf. E.g., American Family Mutual Insurance Co. v. Kivela, 408 N.E.2d 805, 813 (Ind.Ct.App.1980) (insurer "abandoned" insured when it refused to defend on the ground that the policy had been revoked for false statements on the application); Griggs v. Bertram, 88 N.J. 347, 443 A.2d 163 (1982) (insurer failed to promptly notify insured that it was denying coverage). Even those courts which base their findings of liability on the distinction between a release and a covenant not to execute acknowledge the policy implications of an opposite conclusion--settlements such as the one here would no longer serve their intended purpose. E.g., Paynter, 593 P.2d at 953.

Cases reaching the result urged by the insurers here give the "legally obligated to pay" language the practical construction adopted by the magistrate: An insured protected by a covenant not to execute has no compelling obligation to pay any sum to the injured party; thus, the insurance policy imposes no obligation on the insurer. Stubblefield v. St. Paul Fire & Marine Insurance Co., 267 Or. 397, 517 P.2d 262, 264 (1973) (en banc); Bendall v. White, 511 F.Supp. 793, 795 (N.D.Ala.1981); Huffman v. Peerless Insurance Co., 17 N.C.App. 292, 193 S.E.2d 773, 774, cert. denied, 283 N.C. 257, 195 S.E.2d 689 (1973). ³ An individual who is uninsured due to an agent's negligence then will have suffered no damages, as he would have had no rights under the policy anyway. While this interpretation does prevent use of settlements such as that entered into by the parties here, we agree with the magistrate that Iowa public policy does not require a different result in this case.

Injured parties in Iowa have available other means whereby they may, after obtaining a judgment against an insured, gain the insured's rights against the insurer. E.g., Steffens v. American Standard Insurance Co., 181 N.W.2d 174 (Iowa 1970) (injured party after obtaining and executing a judgment against insured could levy on insured's cause of action against insurer and purchase it at a sheriff's sale). The issue, therefore, is whether the additional procedure of prejudgment assignment in return for a promise not to execute also should be available. Iowa's concerns with permitting such a...