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

Decision Date21 January 1963
Citation410 Pa. 55,188 A.2d 320
PartiesLouis T. GEDEON, Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY.
CourtPennsylvania Supreme Court

Tempest & Simmons, Hirsch & Hirsch, Paul A. Simmons, Arnold Hirsch, Monongahela, Donora, for appellant.

Francis H. Patrono, Patrono & Edwards, Washington, for appellee.

Before BELL, C. J., and MUSMANNO, JONES, COHEN, EAGEN, O'BRIEN, and KEIM, JJ.

COHEN, Justice.

An automobile liability insurance policy was issued to appellant by appellee-insurance company on May 18, 1955, insuring him against liability for bodily injury to one person in the amount of $10,000. On August 11, 1955, while the said automobile was being driven by appellant, it was involved in an accident in which appellant's wife, a passenger in the car, was killed. Appellant subsequently qualified as administrator of his wife's estate and, in such representative capacity, instituted suit under the Wrongful Death Act naming himself as defendant-tortfeasor. 1 Appellee refused to defend this action on the grounds that the policy was not in force on the day of the accident, and, even if it were, indemnity for liability to members of the insured's household was specifically excluded from the policy's coverage. Appellant did not hire substitute counsel nor did he spend other funds in defense of the wrongful death action. Trial resulted in a verdict of $51,318.90 in favor of appellant as administrator.

Appellant in his individual capacity then instituted the present action of assumpsit claiming the $51,318.90 judgment as the damages resulting from appellee's breach of its covenant to defend him. The case was heard by a judge sitting without a jury and judgment entered for the appellee. After argument before the court en banc, this judgment was affirmed by a divided court with the majority setting forth three separate reasons for its decision: (1) that the policy was not in force on the day of the accident because of a failure to pay premiums; (2) that even if the policy were in force, obligations to members of the insured's household were specifically excluded from coverage; (3) that even if there were a breach of appellee's contractual obligation to defend, appellant had shown no damages resulting from such breach. Because we agree with the court below on the third of these grounds, we need not determine the correctness of their rulings on the first two grounds.

Under a typical automobile liability insurance policy, such as the one before us, the insurer undertakes three distinct types of obligations, each of which involves different elements of proof to establish breach thereof, and from the breach of which different measures of recovery result. 2 In the first place, the insurer agrees to indemnify against liability for personal or property damage and to indemnify against certain kinds of property damage to the automobile itself. In order to establish breach of this promise to indemnify, the insured must demonstrate that the policy covers the particular risk in question. The amount of recovery for breach of this obligation is usually determined by the terms of the policy.

Secondly, the insurer agrees to defend the insured against any suits arising under the policy 'even if such suit is groundless, false, or fraudulent.' Since the insurer thus agrees to relieve the insured of the burden of defending even those suits which have no basis in fact, our cases have held that the obligation to defend arises whenever the complaint filed by the injured party may potentially come within the coverage of the policy. See Cadwallader v. New Amsterdam Cas. Co., 396 Pa. 582, 152 A.2d 484, 72 A.L.R.2d 1242 (1959). 3 Consequently, there may be an obligation to defend although no obligation to indemnify. See Zeitz v. Zurich General Accident & Liability Company, Ltd., 165 Pa.Super. 295, 67 A.2d 742 (1949); Lee v. Aetna Casualty & Surety Co., 178 F.2d 720 (2d Cir.1950). A refusal without good cause to defend breaches this obligation and gives rise to a cause of action regardless of the good faith of the insurer. 4 See King v. Automobile Underwriters, Inc., Pa., 187 A.2d 584 (1962). Based on the usual contract rule for determining damages, 5 the recovery for breach of the covenant to defend will ordinarily be the cost of hiring substitute counsel and other costs of the defense. This recovery may be in addition to any other obtained against the insurer.

Thirdly, by asserting in the policy the right to handle all claims against the insured, including the right to make a binding settlement, the insurer assumes a fiduciary position towards the insured and becomes obligated to act in good faith and with due care in representing the interests of the insured. If the insurer is derelict in this duty, as where it negligently investigates the claim or unreasonably refuses an offer of settlement, it may be liable regardless of the limits of the policy for the entire amount of the judgment secured against the insured. See Cowden v. Aetna Casualty and Surety Company, 389 Pa. 459, 134 A.2d 223 (1957). 6 Once again there can be a breach of this fiduciary duty without a breach of either the covenant to indemnify or the covenant to defend.

The complaint of appellant-insured evidences his confusion as to the nature of these different obligations of appellee-insurer. The sole basis of the complaint is appellee's refusal to defend the wrongful death action. Appellant does not seek to recover $10,000 under the indemnity clause, 7 nor does he allege a refusal to settle or other mishandling of the claim by appellee. 8 Yet appellant claims as damages for breach of this duty to defend the $51,318.90 judgment obtained against him in the wrongful death action. The cases he relies upon to justify such recovery illustrate his failure to distinguish between...

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