Hamilton v. State Farm Ins. Co.

• Citation: 523 P.2d 193,83 Wn.2d 787
• Decision Date: 06 June 1974
• Docket Number: No. 42971,42971
• Parties: Edwin HAMILTON and Frances Hamilton, his wife, Respondents, v. STATE FARM INSURANCE COMPANY, Petitioner, Frederick V. Betts, Defendant.
• Court: United States State Supreme Court of Washington

Page 787

83 Wn.2d 787

523 P.2d 193

Edwin HAMILTON and Frances Hamilton, his wife, Respondents, v. STATE FARM INSURANCE COMPANY, Petitioner Frederick V. Betts, Defendant.

No. 42971.

Supreme Court of Washington, En Banc.

June 6, 1974.

Rehearing Denied Aug. 1, 1974.

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

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

ROSELLINI, Associate Justice.

The petitioner, State Farm Mutual Insurance Company, issued a public liability policy to the respondents, in which its liability was limited to $10,000 for injuries to any one person. The policy provided, in part:

(The company will) 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; . . .

An action within the scope of the policy was commenced against the respondents by the legal representative of a 6-year-old boy who suffered serious injuries when a vehicle driven by the respondent Frances Hamilton struck him. He claimed damages in the amount of $100,000. The petitioner appointed an attorney, Frederick V. Betts, to defend the suit. The attorney offered $2,500 in settlement of the claim, being of the opinion that Frances Hamilton was not responsible for the accident. This offer was rejected by the plaintiff, who took the position that the minor's injuries were so serious and his medical expenses so great that any settlement less than the policy limits could not be considered. Both parties remaining adamant, no settlement was effected.

The trial of the action resulted in a verdict for the defendants. The plaintiff appealed and this court ordered a new trial upon the ground that the jury had not been properly instructed on the law of contributory negligence as applied to a 6-year-old child. Seholm v. Hamilton, 69 Wash.2d 604, 419 P.2d 328 (1966). We held that after the sixth birthday has been reached and during the ensuing tender years, a child's capacity and his compliance with the standard of care required of a child of like age become questions of fact, and we said that the jury should have been instructed accordingly. We observed that the absence of such an instruction left the jury to speculate that the child was held to the same standard of care as an adult, and the verdict might have been reached upon a finding that the child had failed to exercise that degree of care for his own safety.

While the appeal was pending, the plaintiff offered to settle the case for $5,000. Upon the advice of the attorney, Mr. Betts, the petitioner refused to settle for this amount. After the new trial was ordered, the plaintiff offered again to settle, this time for $7,500, and again the offer was refused. A second trial resulted in a verdict for the plaintiff in the amount of $45,000.

Deciding not to appeal, the petitioner paid the plaintiff $10,000 plus costs. The attorney obtained from the respondents a document releasing State Farm from 'any possible claim (they) might have against it on the basis of bad faith for not having settled the case prior to the second trial.' ¹

This action was instituted by the Hamiltons to recover damages from the petitioner insurer in the amount of $35,000, which was the difference between the $45,000 judgment entered against them and the $10,000 which State Farm paid the plaintiff in the Seholm action. The jury returned a verdict in favor of the respondents. The petitioner appealed to the Court of Appeals, which, in a 2--1 decision, affirmed the judgment entered on the verdict 9 Wash.App. 180, 511 P.2d 1020. A petition for review addressed to this court was granted.

The Court of Appeals stated in its majority opinion that the controlling question in this case is whether the respondents were fairly represented by Betts in connection with the settlement negotiations. It was the position of the respondents that, had the attorney fairly represented their interests, he would have settled the case for either $5,000 prior to the hearing of the appeal or for $7,500 prior to the second trial. The trial court had instructed that negligence on the part of an attorney is the failure to exercise ordinary care and that when an insurance company voluntarily undertakes the defense of an alleged tortfeasor in pursuance of its privilege under a contract of insurance, it assumes a of trust and confidence which calls for an exercise of the utmost good faith, particularly in view of the possible conflict of interest between the insurer and the insured. The court further instructed as follows:

When an attorney is employed by an insurance company to represent the company and its insured in the defense of a claim such as that with which we are concerned here, the attorney and the insured acquire an attorney/client relationship in which the law requires that the lawyer conduct himself as if his client either (1) had no insurance or (2) as if the insurance policy has no limits.

The 'no limit' test affords the best means of determining whether the interests of the insurer and the insurer have been given equal consideration.

If the company through its attorney deviates from this standard and such deviation results in a loss to the insured, whether it be a result of negligence or bad faith, then that insurance company must respond in damages and compensate the insured for his loss.

The jury was instructed that the absence of 'good faith' does not necessarily connote or imply dishonesty, misrepresentation, deceit or a species of fraud, but means that the defendant did not give equal weight to the plaintiff's interest.

Instruction No. 16 advised the jury that a lawyer employed by the insurer to represent the insured owes the insured undivided loyalty, and that where an insurer's attorney has reason to believe that the discharge of his duties to his client, the insured, will conflict with his duties to his employer, the insurer, it becomes incumbent upon him to terminate his relationship with the insured.

Another instruction read:

An error in judgment made by the attorney defending the insurance company's insured in not settling a case within the policy limits is not, in itself, sufficient to prove bad faith or negligence. Also, the mere fact that the insurance company was unsuccessful in the trial of a case does not in itself show that the defense was made not in good faith. While an attorney is held to the exercise of ordinary care in the application of his skill and knowledge to the particular case he is handling, including the question of evaluating and in determining whether or not the case should be settled or litigated, he is not endowed with or expected to have the gift of prophecy so as to be able to predict what the verdict of a jury will be in a personal injury suit.

The jury was further instructed:

Under a liability insurance policy, the insurer has no absolute duty under any and all circumstances whatever to settle the claims made against those whom it insures.

An insurer is not required to settle claims rather than litigate them if reasonably and in good faith the insurer believes that a bona fide issue of liability or damages exists.

We have recognized that, with great unanimity, the cases hold that an insurance company which has paid a judgment against its insured to the extent of its liability under the policy of insurance, may be held liable for damages to its insured for a failure to adjust or compromise a claim within the limits of liability, if that failure is attributable to negligence or bad faith. Murray, Jr. v. Mossman, 56 Wash.2d 909, 355 P.2d 985 (1960). And see Bowker v. McDonald, 49 Wash.2d 633, 305 P.2d 800 (1957). See also Burnham v. Commercial Cas. Ins. Co., 10 Wash.2d 624, 117 P.2d 644 (1941), where we said that if investigation of the circumstances and facts surrounding an accident disclose liability on the part of the insured, it is the affirmative duty of the insurer to make a good faith attempt to effect settlement.

As has been observed in 7A J. Appleman, Insurance Law and Practice § 4712 (Cum.Supp.1974), the terms 'bad faith' and 'negligence' are actually interchangeable, but the terminology means little. It is the factual situation which is significant, in light of the duty which exists, and in the ordinary case the trier of fact must make the determination of liability and nonliability. The same conclusion is reached in 14 Couch on Insurance 2d § 51:7 (R. Anderson 1965), where it is said:

Because of the difficulties involved in the definition of both good faith and due care in connection with the duty of an insurer to settle or compromise a claim against the insured, and because they are to some extent merely the two faces of the same coin, there is a tendency for the two concepts to be fused and to give rise to a joint or consolidated standard. Thus, in a large number of the more recent cases the two tests of 'good faith' and 'negligence' have tended to...