Gaskill v. Preferred Risk Mutual Insurance Company

• Decision Date: 04 February 1966
• Docket Number: Civ. No. 15170.
• Citation: 251 F. Supp. 66
• Parties: Lewis E. GASKILL, Jr. v. PREFERRED RISK MUTUAL INSURANCE COMPANY, an Iowa corporation.
• Court: U.S. District Court — District of Maryland

251 F. Supp. 66

Lewis E. GASKILL, Jr. v. PREFERRED RISK MUTUAL INSURANCE COMPANY, an Iowa corporation.

Civ. No. 15170.

United States District Court D. Maryland.

February 4, 1966.

Melvin J. Sykes and Francis D. Murnaghan, Jr., Baltimore, Md., for plaintiff.

Samuel S. Smalkin, Baltimore, Md., for defendant.

THOMSEN, Chief Judge.

In this diversity action plaintiff (Gaskill), an additional insured under an automobile liability policy issued by defendant (Preferred), is suing Preferred for alleged bad faith and negligence in failing to settle a suit filed against Gaskill arising out of an injury to an infant struck by the insured automobile while driven by Gaskill, which resulted in a judgment against him for an amount far above the policy limit.

The questions presented are: (1) whether Preferred breached any duty it owed to Gaskill; and (2) if it did, whether Gaskill can recover herein, since he has not himself paid out any money.

In Sweeten, Adm'r v. National Mutual Insurance Co., 233 Md. 52, 194 A.2d 817 (1963), the Court of Appeals of Maryland held that a demurrer to a declaration in an action generally similar to the instant case should have been overruled. The Court said:

"The appellee appears to concede that the declaration sufficiently alleges a duty to settle on the part of the insurer, and a breach of that duty, both on the theory of negligence and on the theory of bad faith. We are referred to no Maryland case on the subject nor have we found one. The prevailing view appears to be that recovery should be rested on the theory of bad faith, because the insurer has the exclusive control, under the standard policy, of investigation, settlement and defense of any claim or suit against the insured, and there is a potential, if not actual, conflict of interest giving rise to a fiduciary duty. (Citations omitted) All authorities seem to agree that the liability is in tort, not in contract, although arising out of a contractual undertaking. But many courts hold that the obligation is not merely to exercise good faith but to use due care. Professor Keeton seems to think that there is no practical diference in the results, since on either theory the question is one for the jury. Many courts allow recovery on both theories, and some courts that restrict recovery to bad faith permit evidence of negligence in the proof. In view of the appellee's concession, we see no reason to choose between the two theories in the case at bar." 194 A.2d at 818.

In Lee v. Nationwide Mutual Insurance Co., D.Md., 184 F.Supp. 634, 638 (1960), reversed on other grounds, 4 Cir., 286 F.2d 295 (1961), Judge Watkins said:

"An insurer is not obligated to accept an offer merely because it is within the policy limits. As our Fourth Circuit Court of Appeals said in American Casualty Company of Reading, Pa. v. Howard, 4 Cir., 1951, 187 F.2d 322, 329:

"`Accordingly, when the insurer fully lives up to its duty, there is no right in the insured to compel the insurer to offer the amount of its maximum limit in order to effect the amicable settlement of a claim against the insured and to protect the insured against a possible judgment in excess of the policy limit. Insured can readily secure all needed protection by purchasing, and paying for, a policy with a high limit of liability on the insurer.'

"However an insurer is obligated to exercise a reserved power to negotiate and settle with proper regard for the interests of the insured, and is liable for damage resulting from wrongful failure to settle within policy limits. * * *"

Neither Judge Watkins nor the Fourth Circuit found it necessary to decide whether the duty should be phrased in terms of reasonable care or of good faith.

Since the instant case has been tried on the merits, the Court must consider the nature of the duty in order to decide whether it has been breached. The Court has been aided by the opinion in American Casualty Co. v. Howard, quoted by Judge Watkins, supra, which involved South Carolina law, and by the careful analysis of the problem in Radio Taxi Service, Inc. v. Lincoln Mutual Ins. Co., 31 N.J. 299, 157 A.2d 319 (1960). That case was followed by the Supreme Court of Appeals of Virginia in the recent case of Aetna Casualty & Surety Co. v. Price, Va., 146 S.E.2d 220 (1966), which quoted with approval the following language of the New Jersey Court:

"* * * The obligation assumed by the insurer with respect to settlement is to exercise good faith in dealing with offers of compromise, having both its own and the insured's interests in mind. And it may be said also that a reasonably diligent effort must be made to ascertain the facts upon which a good faith judgment as to settlement can be formulated. * * *

"* * * A decision not to settle must be an honest one. It must result from a weighing of probabilities in a fair manner. To be a good faith decision, it must be an honest and intelligent one in the light of the company's expertise in the field. Where reasonable and probable cause appears for rejecting a settlement offer and for defending the damage action, the good faith of the insurer will be vindicated. * * *"

It seems clear that the duty includes elements both of good faith and of reasonable care. This Court concludes that the proper test of liability in such a case as this (and the test which this Court believes the Maryland Court will probably apply when required to decide the question) is the good faith test, with the amplifications and limitations suggested by the quotations from the New Jersey Court, the Fourth Circuit and Judge Watkins, set out above.

On the second point raised by Preferred herein, the Maryland Court said in Sweeten v. National Mutual Insurance Company, supra:

"The appellee also relies upon a statement by Chief Judge Parker in State Automobile Ins. Co. v. York, 104 F.2d 730, 734 (C.A.4th), cert. den. 308 U.S. 591, 60 S.Ct. 120, 84 L.Ed. 495, that the insured was not damaged by the company's refusal to settle `as he had not paid the judgment against him and testified that he never expected to pay it.' The appellee says that this was an alternate ground of decision, but even if it were, it was in effect disapproved and overruled by the later decision in Lee v. Nationwide Mutual Insurance Company, 286 F.2d 295 (C.A.4th). Certainly the trend of all the recent decisions is towards the view that payment is not a prerequisite to recovery in this type of situation.

* * * * * *

"The appellee also relies upon the case of Dumas v. Hartford Accident & Indemnity Co., 92 N.H. 140, 26 A.2d 361, holding that the essence of the legal injury is pecuniary loss to the plaintiff. We do not agree. Before payment the mere existence of an unsatisfied judgment may cause legal injury by loss or impairment of credit, and inability to obtain or retain an automobile operator's license, except under certain statutory penalties or conditions. We are constrained to follow what we think is the great weight of authority at this time, in a question not previously decided in this State. We think the demurrer should have been overruled." 233 Md. 52, at 56, 57, 194 A.2d 817, at 819.

That decision is binding on this Court.

There is little dispute about the historical facts in the instant case. They are set out in proposed findings submitted by the respective parties, each marked by opposing counsel, to show which facts are admitted, which disputed and which considered immaterial. Most of the disputes were resolved at a hearing, as noted on the original proposed findings. In this opinion the historical facts will be summarized, the ultimate facts found, and the conclusions of law stated.

In August 1959, Gregory Morris, four years of age, was struck on a road in Harford County, Maryland, by an automobile driven by Gaskill with the permission of the owner, Jeannine Williams, who later married Gaskill. Preferred had issued Miss Williams an automobile liability policy with a $10,000 limit for injuries to one person. Under the omnibus clause in the policy, Preferred owed Gaskill the same duties it owed the named insured.

In December 1961 suit was filed against Gaskill and Miss Williams in the Circuit Court for Harford County by Gregory's parents as his next friends and by the parents in their own right for their loss resulting from his injuries. Damages of $300,000 were claimed. A. Freeborn Brown, Esq., of Harford County, and Paul Berman, Esq., of Baltimore City, both experienced trial lawyers, represented Gregory and his parents.

Under the terms of its policy, Preferred was obliged to defend the suit and was vested with absolute control of that defense. In addition, it had the exclusive right to negotiate with respect to possible settlement, and to make, accept or reject any settlement offers.

Preferred engaged as attorneys to represent Gaskill and Miss Williams a law firm in Baltimore City, not the firm and attorney representing Preferred in this case. Samuel D. Hill, Esq., a partner in the firm, handled the case. Preferred wrote to Gaskill and Miss Williams, advising them that the amount claimed was in excess of the policy limit and that they had a right to obtain other counsel to defend them "on the excess of the policy limits". The letter continued: "If you do not desire to obtain additional counsel on your own behalf, you need not, and you may use the services of the counsel which we have selected at no additional expense to you." Gaskill and Miss Williams elected not to obtain additional counsel.

There was some dispute about both the existence of liability and the extent of the injuries to Gregory. Gaskill has consistently maintained that he was not at fault, but Preferred was required to and did evaluate the issue of liability on all the facts. Counsel retained by Preferred to represent Gaskill (hereinafter referred to as "counsel") believed and advised Preferred at an early date that the case was one in which the jury would probably find liability, and the area...