Gibbs v. State Farm Mut. Ins. Co.

• Decision Date: 22 October 1976
• Docket Number: 74-2444,Nos. 74-2347,s. 74-2347
• Citation: 544 F.2d 423
• Parties: 1 Fed. R. Evid. Serv. 566 Michael GIBBS, a minor, by and through his guardian ad litem, Tom Gibbs, Plaintiff-Appellee, v. STATE FARM MUTUAL INSURANCE COMPANY et al., Defendants-Appellants. Michael GIBBS, a minor, by and through his guardian ad litem, Tom Gibbs, Plaintiff-Cross Appellant, v. STATE FARM MUTUAL INSURANCE COMPANY et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 423

544 F.2d 423

1 Fed. R. Evid. Serv. 566

Michael GIBBS, a minor, by and through his guardian ad

litem, Tom Gibbs, Plaintiff-Appellee, v. STATE FARM MUTUAL INSURANCE COMPANY et al., Defendants-Appellants.

Michael GIBBS, a minor, by and through his guardian ad

litem, Tom Gibbs, Plaintiff-Cross Appellant, v. STATE FARM MUTUAL INSURANCE COMPANY et al., Defendants-Appellees.

Nos. 74-2347, 74-2444.

United States Court of Appeals Ninth Circuit.

Oct. 22, 1976.

Jack Miller of Nebaker, Stoops, & Sharon, San Francisco, Cal., for Michael Gibbs.

R. S. Cathcart, Leighton M. Bledsoe, of Bledsoe, Smith, Cathcart, Boyd, & Eliot, San Francisco, Cal., for State Farm Mut. Ins. Co.

Before ELY and TRASK, Circuit Judges, and CHRISTENSEN, ^* District Judge.

TRASK, Circuit Judge.

This is an appeal by an insurance company from a jury verdict and judgment awarded to an injured party for the company's bad faith failure to settle a claim within the limits of an insurance policy. A cross-appeal by the plaintiff asks for punitive damages and a shifting of the burden of proof in the event of a new trial. Jurisdiction of the district court was based upon 28 U.S.C. § 1332 (diversity of citizenship) and 28 U.S.C. § 1441 (removal of cases from state courts). We affirm the judgment and dismiss the cross-appeal.

I

On May 20, 1969, Steven Louwaert shot Michael Gibbs in the leg. Michael, age 12, was visiting Steven, also 12, but after a short time a quarrel developed and Steven told Michael to leave the Louwaerts' home. When Michael refused, Steven tried to frighten Michael by pointing a gun at him. Though Steven later stated that he thought the only operative barrel of the shotgun was empty, the gun discharged, wounding Michael in his right leg. In October 1969, as a proximate cause of this injury, his leg was amputated.

The Louwaerts were covered by a liability insurance policy written by the defendant, State Farm Fire and Casualty Company, sued as State Farm Mutual Insurance Company (State Farm). This policy covered the Louwaerts, including Steven, to a limit of $25,000 for "damages because of bodily injury sustained by other persons"; it also obligated the company to pay medical expenses to the limit of $500 to the injured person. The agreement obligated State Farm to "defend any suit against the insured alleging such bodily injury . . . and seeking damages," though the company reserved the right to investigate the claim. The policy did not, however, apply to "bodily injury . . . caused intentionally by or at the direction of the insured."

On May 21, 1969, Edmond Fey, an independent investigator working for State Farm, began his investigation of the case. His initial reports to State Farm pointed out that while there could be a question about whether the shooting was intentional, the local police of Fremont, California, the city in which the accident occurred, had classified the injury as accidental, and he did not believe coverage should be excluded. Fey also conveyed his belief, formed from his conversations with Michael's father, that Mr. Gibbs wanted coverage only to the policy limits and showed no interest in a lawsuit against his friend, Mr. Louwaert. During these conversations, Fey indicated to Mr. Gibbs that coverage would be extended.

On June 3, 1969, a State Farm Claims Committee consisting of Messrs. Perata, Reed, and Constantine met, agreed that the shooting was accidental, and recommended the extension of coverage. On June 10, 1969, however, General Claims Superintendent J. Kirkham Jenner expressed his opinion that the shooting was intentional and advised the Claims Committee to explore the coverage issue further. On June 19, 1969, Mr. Loughran, also a Claims Superintendent, directed Perata to attempt a compromise settlement at no more than half the policy limit.

On June 26, 1969, Fey submitted another status report indicating that Michael might lose his leg and would definitely be totally disabled for at least one year. He also emphasized that there was no legitimate coverage question, and that Mr. Gibbs would soon consult an attorney. On July 10, 1969, the Claims Committee again recommended coverage and warned that a lawsuit was imminent.

On July 30, 1969, a "General Claims Decision" recommended a settlement "in the neighborhood of 75 percent of our limits of $25,000," but by this time, after a delay of two months, Mr. Gibbs had retained an attorney. On behalf of Michael, he filed a lawsuit against the Louwaerts in the Superior Court of Alameda County, California, on July 31, 1969. Not until August 19, 1970, while the suit was still pending, did Thomas McInerney, State Farm's attorney, advise the plaintiff that the company had decided to offer its policy limits as a settlement.

A judgment in favor of the plaintiff against Steven Louwaert in the amount of $135,673.31 was rendered on June 7, 1971, ¹ of which State Farm paid $27,281.70 (the $25,000 plus court awarded costs). The Louwaerts assigned their cause of action against State Farm to Gibbs, and on March 3, 1972, he brought an action in Alameda County against State Farm for the bad faith failure to settle his claim within policy limits. The plaintiff asked for the remaining $111,984.80, plus interest, as well as for $1,000,000 in punitive damages. After removal to a federal district court on the basis of diversity of citizenship, judgment was entered against State Farm on March 7, 1974, following a jury verdict, for $129,745.76 (the $111,984.80 plus interest). The district court did not allow the jury to consider the punitive damages issue.

II

This appeal and cross-appeal involve four issues:

(1) Was there sufficient evidence of State Farm's bad faith failure to accept a settlement within the limits of the Louwaerts' insurance policy?

(2) Did the trial court err in admitting into evidence certain testimony and documents?

(3) Did the court err in refusing to give certain proposed instructions submitted by State Farm?

(4) What are the merits of Gibbs' cross-appeal for punitive damages and a shifting of the burden of proof?

III

Because this case is in federal court on the basis of diversity of citizenship, 28 U.S.C. §§ 1332, 1441 (1970), we apply "the law of the State": in this instance, California. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). In California, an insurer operates under a good faith duty to accept a settlement:

"(T)here is an implied covenant of good faith and fair dealing that neither party will do anything which will injure the right of the other to receive the benefits of the agreement; . . . it is common knowledge that one of the usual methods by which an insured receives protection under a liability insurance policy is by settlement of claims without litigation; . . . the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose the duty; . . . in determining whether to settle the insurer must give the interests of the insured at least as much consideration as it gives to its own interests." Crisci v. Security Insurance Co., 66 Cal.2d 425, 58 Cal.Rptr. 13, 16-17, 426 P.2d 173, 176-77 (1967).

Liability is not based on malice but rather on "failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing." Id., 58 Cal.Rptr. at 17, 426 P.2d at 177. The insurer must settle when there is a danger of a high recovery:

"When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured's interest requires the insurer to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing." Comunale v. Traders & General Insurance Co., 50 Cal.2d 654, 328 P.2d 198, 201 (1958). Accord, Johansen v. California State Automobile Association Inter-Insurance Bureau, 15 Cal.3d 9, 123 Cal.Rptr. 288, 538 P.2d 744, 747 (1975).

Furthermore, "an insurer who fails to accept a reasonable settlement offer within policy limits because it believes the policy does not provide coverage assumes the risk that it will be held liable for all damages resulting from such refusal, including damages in excess of applicable policy limits." Johansen, supra, 123 Cal.Rptr. at 290, 538 P.2d at 746. Failure to settle because of the belief in noncoverage, even though in good faith, is an effort to further the insurer's own interests, and the insurer must therefore be willing to absorb losses resulting from its failure to settle. Id. 123 Cal.Rptr. at 292, 538 P.2d at 748; Crisci, supra, 58 Cal.Rptr. at 17, 426 P.2d at 177.

Applying these principles to this case, the jury reasonably could have found sufficient evidence to hold State Farm liable for its bad faith failure to settle Gibbs' insurance claim. State Farm was aware of the great risk of a recovery beyond the policy limits: Fey's status report of June 26, 1969, indicated that Michael would be totally disabled for at least one year and that he might lose his leg; on July 10, the Claims Committee acknowledged that a lawsuit was likely; and Perata testified at trial that a realistic estimate of Michael's injuries would have been in excess of $100,000 had there been no policy limit.

State Farm also had a reasonable opportunity to accept a settlement. On numerous occasions, Mr. Gibbs told Fey and Mr. Louwaert that he wanted coverage only to the limits of the insurance policy. Fey and Louwaert wrote letters to State Farm apprising it of Gibbs' desire. Though no formal, written offer existed, the jury could find that Gibbs' statements gave State Farm a reasonable opportunity to settle the claim within the policy limits. Instead, State Farm failed to conduct any negotiations with Gibbs, neglecting its good...