Gruber v. Marshall

• Decision Date: 22 January 2021
• Docket Number: No. 120,513,120,513
• Citation: 482 P.3d 612
• Parties: Kai GRUBER, Personal Representative of the Estate of Christopher S. Gruber, on Behalf of the Next-of-Kin of Christopher S. Gruber, Deceased, Appellee/Cross-appellant, v. The ESTATE OF Ronald MARSHALL, Appellee, and United States Aircraft Insurance Group and United States Aviation Underwriters, Inc., as Manager of USAIG, Appellants/Cross-appellees.
• Court: Kansas Court of Appeals

482 P.3d 612

Kai GRUBER, Personal Representative of the Estate of Christopher S. Gruber, on Behalf of the Next-of-Kin of Christopher S. Gruber, Deceased, Appellee/Cross-appellant,

v. The ESTATE OF Ronald MARSHALL, Appellee,andUnited States Aircraft Insurance Group and United States Aviation Underwriters, Inc., as Manager of USAIG, Appellants/Cross-appellees.

No. 120,513

Court of Appeals of Kansas.

Opinion filed January 22, 2021.

Lynn W. Hursh, of Armstrong Teasdale LLP, of Kansas City, Missouri, for appellants/cross-appellees United States Aircraft Insurance Group and United States Aviation Underwriters, Inc.

Lynn R. Johnson and Daniel A. Singer, of Shamberg, Johnson & Bergman Chartered, of Kansas City, Missouri, Michael W. Blanton, of Blanton Law Firm, of Evergreen, Colorado, and William J. Bahr, of Arthur-Green, LLP, of Manhattan, for appellee/cross-appellant.

No appearance by appellee the Estate of Ronald Marshall.

Before Arnold-Burger, C.J., Hill and Gardner, JJ.

Hill, J.:

Flying from Oklahoma, two friends died when their plane crashed before they made it back to Manhattan, Kansas. Claiming pilot negligence, the estate of the passenger sued the pilot's estate. The two estates settled, and, by agreement, the court entered judgment against the pilot's estate in excess of the insurance coverage. When the passenger's estate garnished the pilot's insurance carrier, it recovered over $11 million. The insurance carrier brings this appeal.

We deal with two questions. We must decide whether the district court was correct when it held that the insurance carrier breached its insurance policy with the insured. And then we must decide whether the garnishment of the pilot's insurance carrier was legal. After that, we address questions about attorney fees and prejudgment interest that are raised in the cross-appeal.

The controversy begins with a tragic accident.

In April 2013, the airplane Ronald Marshall piloted crashed, killing Marshall and his passenger, Christopher Gruber. Marshall, a retired surgeon, had specialized in obstetrics and gynecology in Manhattan. Marshall had often flown his plane around the state to deliver babies and perform surgeries if there was an emergency. At his death, he was married to Judy Marshall and had two children.

When Gruber died, he was 40, married to Kai Gruber, and they had three young children. He worked at the Kansas State University Foundation as a development officer for the College of Veterinary Medicine. He earned about $95,000 a year. Gruber knew Marshall through his involvement with Future Farmers of America in high school. High school students would on occasion stay at the Marshalls' house during FFA conventions. Gruber and Marshall had remained friends after Gruber's high school graduation.

Marshall was insured by the United States Aircraft Insurance Group. We will call the insurer USAIG. Marshall and his son, Rhen, were named insureds on the policy. Along with general liability coverage, Marshall had a "voluntary settlement coverage" rider as a part of a preferred pilot coverage expansion under which USAIG could, upon request of the insured, have to pay a passenger's estate the policy limit of $100,000, regardless of fault, in exchange for a release of liability.

USAIG offered preferred pilot coverage expansion to select pilots who were actively keeping up with their training. This coverage was intended to provide a way for an insured to dispose of a liability claim without an uncomfortable discussion of fault, especially when a deceased passenger was a friend or a relative.

USAIG did not offer the Gruber Estate that $100,000 until more than a year after the crash. By that time, the Gruber Estate refused the offer. After the National Transportation Safety Board concluded the cause of the crash was a loss of control by Marshall for reasons that could not be determined, the Gruber Estate filed a wrongful death lawsuit against the Marshall Estate.

Because USAIG failed to timely offer the Gruber Estate this compensation, it now seeks much more than $100,000 from USAIG. The heart of this action is the Gruber Estate's claim that USAIG was negligent for failing to make a policy limits offer within a reasonable time.

The Marshall Estate believed it had a breach of contract claim against USAIG for failure to timely offer the policy limit under its voluntary settlement coverage. The two Estates entered into an assignment agreement and covenant not to execute. The Marshall Estate agreed to assign to the Gruber Estate its contract claim against USAIG and to admit fault and causation on Gruber's wrongful death claim. In return, the Gruber Estate agreed not to collect from the Marshall Estate any judgment entered against the Marshall Estate. The Gruber Estate presented its case to the trial court that Marshall was solely at fault for the crash and asserted damages over $11 million. The trial court found for the Gruber Estate and entered judgment against the Marshall Estate for the amount sought. USAIG was not a party to that action, nor did it participate in the trial.

Indeed, the trial court found that USAIG both negligently and in bad faith breached its insurance contract with the Marshall Estate over the voluntary settlement coverage. The court found that this breach of contract caused the entry of an excess judgment against the Marshall Estate and therefore USAIG was liable for the entire $11 million judgment. Rather than have to pay $100,000—the policy limit—USAIG was ordered to pay $11 million.

USAIG appeals, attacking the judgment on three fronts. First, it claims the court's finding that it negligently and in bad faith breached the voluntary settlement provision of the insurance contract is not supported by substantial competent evidence. Second, in its view, the court erred when it held that USAIG's claimed breach of the insurance contract caused the excess judgment against Marshall's Estate. Finally, the court erred when it held that Gruber's Estate had met its burden of showing the assignment agreement between the two Estates was entered into in good faith and the judgment was reasonable.

The Gruber Estate, in a cross-appeal, contends the district court erred by failing to award prejudgment interest on its claim and when it failed to award attorney fees as allowed by law.

There are unique rules on insurance companies and their insureds.

Before we examine the record for any evidence supporting the court's findings, we review the law concerning insurers and their duties. It provides a context to understand the significance of the court's holding.

The law imposes several duties upon insurers. In defending and settling claims against its insured, an insurer of a liability policy owes to the insured the duty to act in good faith and without negligence. A failure to do so will lead to the insurer being held liable for the full amount of the insured's resulting loss, even if that amount exceeds policy limits. Bollinger v. Nuss , 202 Kan. 326, Syl. ¶ 1, 449 P.2d 502 (1969).

The insurer must conduct itself with that degree of care which would be used by an ordinarily prudent person in the handling of his or her own business. An insurer may consider its own interests, but it must at least equally consider the interests of the insured. This means that the insurer must evaluate the claim without a consideration of the policy limits and as though it alone would be responsible for the entire amount of any judgment rendered on the claim. Bollinger , 202 Kan. 326, Syl. ¶ 4, 449 P.2d 502.

The question of liability of the insurer for negligence or bad faith ultimately depends on the circumstances of the case and must be determined by considering various factors. Bollinger , 202 Kan. 326, Syl. ¶ 5, 449 P.2d 502. Those factors include:

• the strength of the claimant's case on the issues of liability and damages;

• attempts by the insurer to induce the insured to contribute to a settlement;

• failure of the insurer to properly investigate;

• the insurer's rejection of the advice of its own attorney or agent;

• failure of the insurer to inform the insured of a compromise offer;

• the amount of financial risk which each party is exposed;

• the fault of the insured in inducing the insurer's rejection of a compromise offer by misleading it on the facts; and

• any other factors tending to establish or negate bad faith.

Bollinger , 202 Kan. at 338, 449 P.2d 502.

When an insurer acts honestly and in good faith upon adequate information, it will not be held liable for mere errors of judgment because it failed to prophesy the result. The insurer does not act in bad faith if it honestly believes, and has good cause to believe, that any probable liability will be less than policy limits. Bollinger , 202 Kan. 326, Syl. ¶ 8, 449 P.2d 502.

The insurer has a duty to defend the insured including to investigate, communicate with the insured, and negotiate settlement. See Geer v. Eby , 309 Kan. 182, 193, 432 P.3d 1001 (2019) ; Covill v. Phillips , 452 F. Supp. 224, 226 (D. Kan. 1978).

When a settlement offer approximates policy limits, there is a conflict of interest between the insured and insurer because the insured wants to avoid the risk of a large judgment by settling within policy limits, but the insurer has little to lose by proceeding to trial because the extent of its liability is fixed. Bollinger , 202 Kan. at 336, 449 P.2d 502.

The insurer thus has a duty to settle if the insurer would start settlement negotiations on its own behalf were its potential liability equal to that of its insured. An insurer must exercise diligence and good faith in its efforts to settle damage claims within the policy limits. Farmers Ins. Exchange v. Schropp , 222 Kan. 612, Syl. ¶¶ 4, 567 P.2d 1359 (1977). The fiduciary relationship between the insurer and insured imposes a duty on the insurer to make reasonable efforts to negotiate a settlement. The insurer has to begin settlement negotiations regardless of the actions of the injured party. Rector...