Gray v. Nationwide Mut. Ins. Co.

• Decision Date: 27 September 1966
• Citation: 422 Pa. 500,223 A.2d 8
• Parties: Robert A. GRAY, Appellant, v. NATIONWIDE MUTUAL INSURANCE COMPANY.
• Court: Pennsylvania Supreme Court

223 A.2d 8

422 Pa. 500

Robert A. GRAY, Appellant, v. NATIONWIDE MUTUAL INSURANCE COMPANY.

Supreme Court of Pennsylvania.

September 27, 1966.

Milford J. Meyer, Philadelphia, Charles H. Weidner Reading, Meyer, Lasch, Hankin & Poul, Philadelphia, Stevens &amp Lee, Reading, of counsel, for appellant.

Michael Shekmar, Philadelphia, for appellee.

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

OPINION

JONES Justice.

Robert A. Gray, (Gray), instituted a trespass action against Robert B. MacLatchie, (MacLatchie), for personal injuries and property loss suffered as the result of a collision which occurred at a street intersection on April 5, 1957, between Gray's automobile and an automobile owned and driven by MacLatchie. At the time of the accident, MacLatchie was insured by Nationwide Mutual Insurance Company, (Nationwide), under an automobile liability policy, the coverage of which was limited to $5,000 for personal injuries plus interest, costs and property damage. Nationwide undertook to defend MacLatchie pursuant to the provisions of its insurance policy. Gray obtained a $15,000 jury verdict against MacLatchie. Post-trial motions for judgment n.o.v. and for a new trial were denied and the judgment entered on the verdict was affirmed per curiam, on May 22, 1961, by this Court. Gray v. MacLatchie, 403 Pa. 595, 170 A.2d 590 (1961).

Nationwide paid its entire policy coverage with interest and costs on account of the judgment to Gray in the sum of $5,236.67. Gray demanded the balance of the judgment, $9,763.33, from MacLatchie who, then, assigned to Gray all of his rights against Nationwide. This assignment provided that, regardless of the outcome of Gray's suit against Nationwide, any obligation of MacLatchie owed to Gray would be satisfied at the conclusion of the suit of Gray against Nationwide.

Gray, on the basis of the assignment of MacLatchie, then instituted an assumpsit action against Nationwide in the Court of Common Pleas (No. 5) of Philadelphia County to recover the balance of the judgment. Nationwide filed preliminary objections in the nature of a demurrer which the court below sustained and Gray's complaint was dismissed. Gray then appealed to the Superior Court which affirmed the trial court's order by an equally divided court. ^[1] Gray v. Nationwide Mutual Insurance Company, 207 Pa. Super. 1, 214 A.2d 634 (1965). On December 3, 1965, the Superior Court certified this appeal to our Court at Gray's costs.

Gray asserted in his complaint that, prior to the Gray-MacLatchie suit, he had made an offer to settle with Nationwide within the liability limits of MacLatchie's policy but that Nationwide had refused this offer, Allegedly in bad faith, forcing Gray to bring suit; ^[2] that judgment on the verdict in that suit having been rendered at fifteen thousand dollars, ($15,000) or, in other words, ten thousand dollars ($10,000) over the liability limits of MacLatchie's policy, MacLatchie had the right to be reimbursed by his insurer, Nationwide for the Entire amount of the judgment; therefore, Gray concluded that, since MacLatchie had assigned all his rights against Nationwide to Gray, he, Gray, standing in MacLatchie's shoes, could sue Nationwide directly for the unpaid balance of the judgment.

We believe Gray's contentions are meritorious. Because Nationwide's preliminary objections in the nature of a demurrer were sustained by the trial court, We must assum, for purposes of this appeal, that, As alleged, Nationwide did act in bad faith by refusing to settle with Gray for an amount within the limits of MacLatchie's policy. ^[3] Nationwide's preach of its obligation gave MacLatchie a right of action against it for the amount of judgment against him in excess of the limits of the policy coverage. Cowden v. Aetna Casualty and Surety Company, 389 Pa. 459, 134 A.2d 223 (1957). '* * * (B)y 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.' Gedeon v. State Farm Mutual Automobile Insurance Company, 410 Pa. 55, 59, 188 A.2d 320, 322 (1963).

Initially, we must decide whether or not MacLatchie's Payment to Gray of the balance due on the judgment is a prerequisite to a cause of action in MacLatchie against Nationwide. ^[4] There is no Pennsylvania decision directly on point, but a number of other jurisdictions have faced exactly this problem. 'Despite some conflict in earlier cases, the weight of authority is that it is not necessary for the insured to allege that he has paid or will pay a judgment in excess of the policy limits in an action against the insurer for breach of its duty to act in good faith. Lee v. Nationwide Mut. Ins. Co., 286 F.2d 295 (4th Cir.). Wessing v. American Indem. Co., D.C., 127 F.Supp. 775; Alabama Farm Bureau Mut. Cas. Ins. Co. v. Dalrymple, (270 Ala. 119, 116 So.2d 924); Farmers Ins. Exch. v. Henderson, 82 Ariz. 335, 313 P.2d 404; Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 319 Pa.2d 69, 66 A.L.R.2d 1202; Henke v. Iowa Home Mut. Cas. Co., 250 Iowa 1123, 97 N.W.2d 168; Southern Fire & Cas. Co. v. Norris, supra (35 Tenn.App. 657, 250 S.W.2d 785). See Murray v. Mossman, 56 Wash.2d 909, 355 P.2d 985.' Jenkins v. General Accident Fire & Life Assurance Corporation, Mass., 212 N.E.2d 464, 467 (1965). See also: Burton v. State Farm Mutual Automobile Insurance Company, 335 F.2d 317 (5th Cir. 1964); Sweeten v. National Mutual Insurance Company of D.C., 233 Md. 52, 194 A.2d 817 (1963). Three very sound reasons justify the adoption of this 'non-payment' view: (1) such view prevents an insurer from benefiting from the impecuniousness of an insured who has a meritorious claim but cannot first pay the judgment imposed upon him; (2) such view negates the possibility that the insurer would be '* * * less responsive to its trust duties where the insured is able to pay the excess judgment. Were payment the rule, an insurer with an insolvent insured could unreasonably refuse to settle, for, at worst, it would only be liable for the amount specified by the policy. To permit this would be to impair the usefulness of insurance for the poor man.' Note, 27 U. Pitt. L. Rev. 726, 728 (1966); (3) such view recognizes that the fact of entry of the judgment itself against the insured constitutes a real damage to him because of the potential harm to his credit rating; See, generally, Note, 27 U.Pitt.L.Rev. 726 (1966); Note, 60 Mich.L.Rev. 517 (1962); Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv.L.Rev. 1136 (1954).

Concluding that MacLatchie did not have to pay the excess judgment before asserting his claim against Nationwide, we next must consider the question of whether or not MacLatchie can validly assign his claim to Gray.

To solve this problem, novel in Pennsylvania, we must first dispel a line of reasoning maintained by Nationwide, the trial court and three members of the Superior Court which urges that Gray has no direct right of action against Nationwide because (a) Gray is a stranger to the relationship between the insured and the insurer, the latter owing no duty to Gray; (b) Gray has actually benefited by the action of Nationwide in not settling within policy limits rather than having actually sustained any damage; therefore, Gray should not be allowed to do indirectly by assignment what he cannot do directly. We believe that, while premises (a) and (b) are correct, such premises are irrelevant in the factual posture of this litigation. Gray is not suing In his own right but is suing As an assignee of MacLatchie, the insured; consequently, Gray is standing in MacLatchie's shoes. It is immaterial, therefore, that not duty is owed to Gray In his own right by the insurer and that, while Gray may be said to have benefited by the failure to settle, ^[5] MacLatchie Was definitely injured thereby. Finally, if MacLatchie's cause of action can be assigned to Gray, then Gray can, as any other assignee, do indirectly what he could not have done directly.

Our task is to determine whether MacLatchie, the insured, has a cause of action in assumpsit or in tort against the insurer for its wrongful refusal to settle. In Cowden v. Aetna Casualty and Surety Company, 389 Pa. at 468, 134 A.2d at 227, the late Mr. Chief Justice Charles Alvin Jones stated: 'It is established by the greatly preponderant weight of anthority in this country that an insurer against public liability for personal injury may be liable for the entire amount of a judgment secured by a third party against the insured regardless of any limitation in the policy, if the insurer's handling of the claim, including a failure to accept a proffered settlement, was done in such a manner as to evidence bad faith on the part of the insurer In the discharge of its contractual duty.' (Emphasis added.) Giving the reason for this rule, Mr. Chief Justice Jones continued: 'And, in Wiener v. Targan, 100 Pa.Super. 278, 284, it was recognized that the Contractual relationship under an indemnity policy was one requiring 'a high degree of good faith in the conduct of the indemnity company's counsel generally * * *. '' 389 Pa. at 469, 134 A.2d at 228. (Emphasis added.) In Gedeon v. State Farm Mutual Automobile Insurance Company, 410 Pa. 55, 188 A.2d 320 (1963), Mr. Justice Cohen elaborated on the duties of an insurer to his insured:...