Jones v. National Emblem Ins. Co.

• Decision Date: 29 July 1977
• Docket Number: Civ. A. No. 5-71097.
• Citation: 436 F. Supp. 1119
• Parties: Emmanuel JONES, Margaret Sanders, and Samuel Washington, Plaintiffs, v. NATIONAL EMBLEM INSURANCE COMPANY, an Illinois Corporation, Defendant.
• Court: U.S. District Court — Western District of Michigan

436 F. Supp. 1119

Emmanuel JONES, Margaret Sanders, and Samuel Washington, Plaintiffs, v. NATIONAL EMBLEM INSURANCE COMPANY, an Illinois Corporation, Defendant.

Civ. A. No. 5-71097.

United States District Court, E. D. Michigan, S. D.

July 29, 1977.

Robert Goren, Frimet, Goren & Bellamy, Southfield, Mich., for plaintiffs.

William A. Joselyn, Joselyn, Rowe, Jamieson & Grinnan, Detroit, Mich., for defendant.

MEMORANDUM OPINION AND ORDER

JOINER, District Judge.

This case arose from a disastrous automobile ride on March 29, 1964 in which all three plaintiffs were seriously injured. Jones, the owner of the automobile, and Washington rode as passengers. Sanders, who was driving the automobile, had been awake for more than 24 hours and had been drinking. While driving the automobile at a high rate of speed, Sanders caused it to crash into a viaduct. As a result of the accident, Washington became totally blind, suffered fractures of the knee, leg, rib, skull, nasal septum, and jaw, was unable to walk and had difficulty in standing. He was 36 years old at the time of the accident, the father of five children, and employed as a truck driver. Washington brought suit against Jones and Sanders. National Emblem, defendant herein, assumed the defense of Jones and Sanders in that case.

Before trial, counsel for Washington offered to settle the claim for Jones' policy limits of $10,000. National Emblem refused the offer, insisting instead upon its own settlement offer of $1,500, which it increased to $3,000 on the eve of trial. Washington's counsel again offered to settle for the policy limits of $10,000 after the commencement of trial but before selection of the jury, and he repeated the same offer following denial of the defendant's motion for directed verdict. The offers were refused, and the jury returned a verdict of $311,000.

The present action is brought by Washington, as judgment creditor, and by Jones and Sanders, as his judgment debtors, against the insurer on the ground that it breached its duty to use in good faith its exclusive and discretionary power to control settlement negotiations. Plaintiffs pray for $301,000 — the value of the underlying judgment less the policy limits, which the insurer has paid plus interest. The defendant has moved to dismiss or for summary judgment against Washington on the ground that he is not the real party in interest. The three plaintiffs also have moved for summary judgment, on the ground that the insurer's bad faith is established as a matter of law by its failure to adequately notify its insured of: (1) the possibility of a judgment against them in excess of the policy limits; (2) their right to retain independent counsel; (3) the insurer's potential conflict of interest; and (4) the settlement offers and the significance of their rejection.

I. Direct Action by the Injured Person Against the Insurer.

Washington stands before this court as the judgment creditor on the underlying personal injury claim against Jones and Sanders, the insured. Jones and Sanders have not assigned their cause of action against the insurer to Washington. Rather, judgment creditor and judgment debtors join together in a united action against the insurer.

It is now settled, in Michigan as elsewhere, that the insured may bring suit against the insurer for the latter's bad faith refusal to settle a claim within the policy limits. Wakefield v. Globe Indemnity Co., 246 Mich. 645, 225 N.W. 643 (1929). The basis for this duty is the insurer's exclusive control over settlement negotiations, coupled with the "conflict between the insurer's interest to pay less than the policy limits and the insured's interest not to suffer liability for any judgment exceeding them." Bourget v. Government Employees Ins. Co., 456 F.2d 282, 285 (2d Cir. 1972). See R. Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv.L.Rev. 1136, 1138 (1954).

Traditionally, breach of this duty has been considered tortious, and the cause of action has been considered personal to the insured. The only one toward whom the insurer owes a duty is the insured, and therefore it has always been assumed that the only one injured by breach of this duty is the insured. Consequently, refusal-to-settle claims brought directly by the insured's judgment creditor against the insurer traditionally have been dismissed. See e. g., Bennett v. Slater, Ind.App., 289 N.E.2d 144, 63 A.L.R.3d 670 (1972); Rowe v. United States Fidelity & Guaranty Co., 421 F.2d 937 (4th Cir. 1970); Dillingham v. Tri-State Ins. Co., 214 Tenn. 592, 381 S.W.2d 914 (1964); Annot., 63 A.L.R.3d 677 (1975).

However, it does not follow with irresistible necessity that because the insurer owes no duty to the injured party, the latter has no interest in the cause of action for breach of the insurer's duty. It makes little or no sense to restrict the bad faith claim against the insurer to its insured, even though he is the only person to whom the insurer owes a duty. The injured person has interests in the bad faith claim that are substantial: the injured person proposed the settlement, and it was his offer that the insurer rejected; he was forced to undergo the emotional and financial rigors of trial and to rely wholly on the uncertainty of a jury verdict for his recovery because of the insurer's refusal to accept his settlement offer. The value of the bad faith claim is controlled by the amount of the underlying personal injury judgment, and it is considered "sufficiently liquidated" for the judgment creditor to proceed directly against the insurer by way of garnishment.¹

A direct cause of action by the injured person against the insurer serves the public interest in a number of ways. First, it encourages the settlement of personal injury claims, because an insured of modest means may avoid his liability above his policy limit by filing for bankruptcy.² If the insured discharges his debt by filing in bankruptcy, he has no reason to pursue his cause of action against the insurer. Given the possibilities in bankruptcy, neither insurer nor insured have much to fear by refusing to accept a policy-limits settlement offer. The only person adversely affected by the insured's bankruptcy proceedings is the injured person, who is left with nothing. If the courts recognize the cause of action in one who has the motivation to pursue it, the insurer is encouraged to conduct settlement negotiations responsibly.

A direct cause of action also eliminates the danger of the insured reaping a windfall from his own wrongdoing by slipping away with and quickly dissipating the proceeds of a judgment against his insurer.

Finally, a direct cause of action reduces the quantity of litigation required to discharge the insured's liability on the underlying judgment.

In recognition of these and similar considerations, it has been held that the judgment creditor may sue the tort-feasor's insurer directly for its fraud or bad faith in the conduct or handling of the suit, without an assignment by the judgment debtor. Thompson v. Commercial Union Ins. Co. of New York, 250 So.2d 259 (Fla.1971). It appears that Michigan would adopt a similar rule. In Rutter v. King, 57 Mich.App. 152, 226 N.W.2d 79 (1974), the court of appeals held that the judgment creditor may maintain a garnishment action directly against the insurer after what appears to be an in voluntary assignment by the insured of his bad faith claim. Although the court expressly declined to rule on the question squarely presented to this court, because of the presence of an assignment, it did note that: "The single issue which would be involved in a direct action suit — did the insurer in fact exercise bad faith — is the identical unresolved issue which will be litigated to conclusion in the garnishment proceedings." 57 Mich.App. at 172, 226 N.W.2d at 88.

The court concludes that for the purpose of satisfying the requirements of F.R.C.P., Rule 17(a), the following factors establish the judgment creditor as a real party in interest: (1) the insurer's bad faith in the handling of the claim forced the injured person to go to trial; (2) the cause of action for bad faith arose from the insurer's rejection of the injured person's settlement offer; (3) the amount of the underlying personal injury judgment controls the value of the bad faith claim; and (4) this amount is owed in full to the injured person by the insured.

The court's holding is not intended to minimize in any way the insured's substantial interest in the bad faith claim. The insurer's duty to handle the claim in good faith is owed to its insured. It is he who is liable for the underlying personal injury judgment, and he will be the only source for satisfaction of that judgment if the bad faith claim against the insurer fails.

In this case, the insured joined with their judgment creditor as plaintiffs, and all pray for damages equal to the amount of the underlying judgment less the policy limits, payable to them "as their interest may appear."³ Absent an assignment, Jones and Sanders continue to have a substantial interest in this lawsuit, and they will not be dismissed.⁴

For the reasons set forth above, the defendant's motion to dismiss or for summary judgment is denied.

II. The Insurer's Liability for Refusing to Settle.

In seeking summary judgment in their favor, plaintiffs rely on the insurer's failure to notify Jones and Sanders regarding: (1) their liability greatly in excess of the policy limits; (2) their right to retain independent counsel; (3) the insurer's conflict of interest; and (4) the significance of Washington's offer to settle within the policy limits.

The only correspondence presently on record in this case is a letter from the insurer to Jones dated March 5, 1968, informing him that Washington had proposed settlement for $10,000; that "(t)his figure is representative of your single injury limits under the policy issued to you"; that because Washington...