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

• Citation: 511 P.2d 1020,9 Wn.App. 180
• Decision Date: 25 June 1973
• Docket Number: No. 1161--I,1161--I
• Parties: Edwin HAMILTON and Frances Hamilton, his wife, Respondents, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellants.
• Court: Court of Appeals of Washington

Page 180

9 Wn.App. 180

511 P.2d 1020

Edwin HAMILTON and Frances Hamilton, his wife, Respondents, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellants.

No. 1161--I.

Court of Appeals of Washington, Division 1, Panel One.

June 25, 1973.

Rehearing Denied Sept. 18, 1973.

Skeel, McKelvy, Henke, Evenson & Betts, R. L. Gemson, Seattle, Alfred McBee, Mount Vernon, for appellants.

Voris & Lipscomb, Michael C. Lipscomb, Bellingham, for respondents.

WILLIAMS, Judge.

This action was brought by Edwin Hamilton and his wife, the insured, to recover damages from State Farm Mutual Automobile Insurance Company, the insurer, and Frederick V. Betts, an attorney, because of a judgment taken against the Hamiltons which was in excess of the policy limits in a liability insurance contract. In its answer, State Farm denied liability and affirmatively pleaded a release. A voluntary nonsuit was entered dismissing Betts from the case. The cause was tried to a jury, which returned a verdict of $35,000 for the Hamiltons. From the judgment entered upon the verdict, State Farm appeals.

The policy which State Farm issued to the Hamiltons limited liability to $10,000 for injury to one person and provided that in the event an action was brought against the insured for a claim within the scope of the policy, it, State Farm, would undertake the defense. An action within such scope but far in excess of the policy limits was commenced against the Hamiltons by the legal representative of a 6-year-old boy who was injured when a vehicle driven by Mrs. Hamilton struck him. Trial of the action resulted in a verdict for the defense. On appeal, a new trial was ordered, Seholm v. Hamilton, 69 Wash.2d 604, 419 P.2d 328 (1966) and this time the jury returned a verdict of $45,000 for the plaintiff. The Hamiltons then signed a document releasing State Farm from liability and State Farm paid $10,000 and costs into the registry of the court. Notice of appeal, later abandoned, was filed.

In this action, the Hamiltons sought to recover from State Farm the sum of $35,000, which was the difference between the $45,000 judgment entered against them in the Seholm case and the $10,000 which State Farm paid thereon. The jury received evidence as to the conduct of the defense by Betts, the circumstances of settlement negotiations conducted by the attorneys for the parties, the opinion of experts upon the value of the boy's claim and a lawyer's duty in the circumstances, and the release. There is no real contention that Betts did not prepare for and conduct the two trials and the appeal with skill and resourcefulness. The Hamiltons, through their counsel, concede as much.

The controlling question is whether the Hamiltons were fairly represented by Betts in connection with the settlement negotiations. Canon 8 of the Canons of Professional Ethics, in effect at the time in question, in part reads:

A lawyer should endeavor to obtain full knowledge of his client's cause before advising thereon, and He is bound to give a candid opinion of the merits and probable result of pending or contemplated litigation . . . Whenever the controversy will admit of fair adjustment, the client should be advised to avoid or to end the litigation.

(Italics ours.)

Two lawyers called as experts by the Hamiltons testified that this canon applied to Betts in his conduct of the Hamilton defense in the Seholm case. One of them said:

The standards that pertain in this situation are that, one, you must at all times keep your client advised as to any settlement offers received. And more than that, you must give your client your candid and well thought out recommendations with respect to such settlement offers. That is part of the canon, part of the duties of a lawyer.

Tyler v. Grange Ins. Ass'n, 3 Wash.App. 167, 473 P.2d 193 (1970) is pertinent upon the question of settlement negotiations conducted by one lawyer representing both insurer and the insured. There, it is said at page 177, 473 P.2d at page 199:

The conclusion reached by a growing number of cases is both the interests of the insured and the insurer must be given equal consideration and the only practical test by which to apply this standard is to have the insurer consider the total risk in deciding whether or not to accept a settlement offer, without regard to who is bearing what portion of that risk.

In the absence of a holding by our state that application of the fiduciary obligation principal demands a conclusion there is strict liability on the part of the insured, we adopt the 'no limit' test as the best means of determining whether the interests of the insurer and the insured have been given equal consideration. This rule should be applied whether the insurer is being judged by either a negligence or good faith standard. This is supported in Appleman, at § 4712, where he states:

The insurer's duty to act diligently and in good faith extends up to the full limits of the policy and beyond. Good faith requires that the insurer make its decision as to settlement or defense of the suit as if no policy limit of liability existed, . . .

(Footnotes omitted.)

State Farm contends that Betts did perform the duty required of him by the canon; that he did inform the Hamiltons of the State Farm offer which was maintained at $2,5000 throughout and of the Seholms' offers of $10,000, $7,500 and $5,000. The evidence is not clear upon just how much discussion the Hamiltons and Betts had with reference to an adjustment of the Seholm claim to end litigation. Communication between State Farm and Betts is well documented, but as between the Hamiltons and Betts, it was mostly oral except for comments such as, 'case could not be settled for anything less than the full amount of the policy . . .' and '(w)e have offered to pay the plaintiff $2500.00, but that offer has been refused.' and '(w)e have been trying to arrive at a settlement but at this time it appears that a settlement is very unlikely.' in letters which Betts wrote to the Hamiltons telling them about the preparation of the case and confirming appointments.

The two lawyers who were called as experts testified that, in their opinion, there was sufficient evidence of liability to take the Seholm case to the jury, and that any verdict returned against the Hamiltons would be very substantial because of the seriousness of the boy's injuries. One of the witnesses said that the probable verdict value was between $55,000 and $60,000 if there were clear liability and the case had a settlement value of about $25,000 when the element of questionable liability was considered. The other witness placed a $70,000 to $75,000 probable verdict value if there were clear liability and valued the claim at $30,000 when the element of liability was considered. It is significant, therefore, that Betts testified that, in evaluating the Seholm claim, he never did put a dollar amount upon the size of verdict the Hamiltons could expect if judgment was entered against them.

Also, it is important that there is no evidence that the Hamiltons were consulted concerning the settlement posture which they and State Farm were assuming. The documentary evidence is very strong that State Farm and Betts decided early in the negotiations that $2,500 was all that should be offered, and that that one offer was the only one advanced on behalf of the Hamiltons throughout the litigation. Although, as seen, the Hamiltons were told of the position taken by their insurance carrier and their attorney, it does not appear that at any time they were included in the settlement discussions or decisions. Both of the Hamiltons denied having been told of Seholm's offers of settlement for $5,000 and $7,500. Betts testified that he did not tell Mrs. Hamilton, with whom he had the most contact, that if the case were not settled she could very possibly suffer a loss of several thousand dollars.

Upon the evidence, the jury could reasonably determine that State Farm and Betts conducted settlement negotiations on the basis of limited coverage, rather than on a balancing of the probabilities of a defendant's verdict against the near certainty of a large award for the boy's injuries if the boy prevailed. There was substantial evidence from which the jury could determine that the Hamiltons were not well served by their lawyer, and that the failure of their lawyer properly to advise and represent them in connection with the settlement negotiations was a proximate cause of their incurring a judgment debt of $35,000.

State Farm contends that the Hamiltons could have retained their own lawyer if they had wished, and that they were told on several occasions that they had that right. Of course, they did have that right, but the insurance coverage was that State Farm would:

defend any suit against the insured alleging such bodily injury or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; but the company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient.

Betts had been representing State Farm for 30 years and was its acknowledged agent in the Seholm case. That did not prevent him from representing the Hamiltons, of course, unless his association with State Farm prevented him from doing so properly. If, for that reason, Betts could not represent the Hamiltons as the law required him to do, then it was incumbent upon State Farm to furnish them an attorney who could do so.

In this connection, we observe that Betts undoubtedly discharged his professional duties to State Farm in a completely satisfactory manner. In doing so, he could not, or did not, or the jury was justified in finding that he could not, or did not, provide equally loyal service to the Hamiltons. It may very well be that under the circumstances it was humanly impossible for one lawyer to represent both State Farm and the Hamiltons. ¹ Nevertheless, as seen, the Hamiltons...