Kabatoff v. Safeco Ins. Co. of America, 78-2717

• Decision Date: 10 September 1980
• Docket Number: No. 78-2717,78-2717
• Citation: 627 F.2d 207
• Parties: Nellie KABATOFF, Plaintiff-Appellee, v. SAFECO INSURANCE COMPANY OF AMERICA, a corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 207

627 F.2d 207

Nellie KABATOFF, Plaintiff-Appellee, v. SAFECO INSURANCE COMPANY OF AMERICA, a corporation Defendant-Appellant.

No. 78-2717.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 8, 1980.

Decided Sept. 10, 1980.

Carrell F. Bradley, Schwenn, Bradley & Batchelor, Hillsboro, Or., for defendant-appellant.

William F. Schulte, Portland, Or., for plaintiff-appellee.

Appeal from the United States District Court for the District of Oregon.

Before KILKENNY and PREGERSON, Circuit Judges, and TAKASUGI, ^* District Judge.

PREGERSON, Circuit Judge:

This diversity case involves a claim under Oregon law against an insurer for bad faith failure to settle a claim asserted against its insured. The insurer, Safeco Insurance Co., appeals from the district court's judgment awarding the insured, appellee Nellie Kabatoff, $20,000 in damages for Safeco's failure to settle a personal injury claim asserted against her. Safeco also appeals from the district court's award to Kabatoff of $25,000 as reasonable attorney's fees. Finding no error, we affirm.

Appellee Nellie Kabatoff was involved in an automobile accident with Jack McElwain in Marion County, Oregon on February 28, 1974. McElwain sued Kabatoff in Oregon state court for $57,000 in damages for personal injuries sustained in the accident. Appellant Safeco was Kabatoff's insurer, and by the terms of the insurance contract, Safeco exercised total control over the defense and settlement of the McElwain action. During pretrial settlement negotiations, McElwain offered to settle the litigation for $10,000. Safeco's highest settlement offer was $6,500, even though Safeco had established a cash reserve of $22,500. The case was ultimately tried to an Oregon jury which returned a verdict in favor of McElwain for $45,000. ¹ Kabatoff's policy limit was $25,000; hence, she was personally liable for the excess $20,000.

Kabatoff then filed the present action in United States District Court for the District of Oregon, seeking $20,000 in damages for Safeco's asserted bad faith failure to settle the state case. A federal jury returned a verdict in favor of Kabatoff for the full $20,000. In addition, United States District Judge Belloni ordered Safeco to pay Kabatoff $25,000 as reasonable attorney's fees.

Safeco now argues on appeal that: (1) the federal district judge erred in instructing the jury that Safeco was liable if it acted in bad faith or if it failed to exercise due care in settling the claim against its insured; (2) the evidence is insufficient to support the verdict; and (3) the award of attorney's fees is unreasonable.

In this diversity action, the federal district court must apply the substantive law of the forum state, Oregon. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). We accord substantial deference to the district court's construction of the law of the state in which it sits. Holcomb Construction Co. v. Armstrong, 590 F.2d 811, 813 (9th Cir. 1979); Lewis v. Anderson, 615 F.2d 778 (9th Cir. 1979). Moreover, we will not overrule a district judge on questions of construction of state law unless the judge's determinations are "clearly wrong." Gee v. Tenneco, Inc., 615 F.2d 857, 861 (9th Cir. 1980). As to the $20,000 jury verdict, under the federal standard of review, a jury's verdict may not be disturbed unless it is clearly erroneous. Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123, 89 S.Ct. 1562, 1576, 23 L.Ed.2d 129 (1969). Although Oregon applies the substantial evidence test to support a jury verdict, see Myers v. Cessna Aircraft Corp., 275 Or. 501, 553 P.2d 355, 362 n.2 (1976), the state and federal standards are basically equivalent. Ronish v. St. Louis, 621 F.2d 949 at 949-951 (9th Cir. 1980). To support the jury's verdict, we, therefore, need not decide which standard federal or state is appropriate. Longenecker v. General Motors Corp., 594 F.2d 1283, 1285 (9th Cir. 1979). ²

The district judge, in substance, instructed the jury that Safeco was liable if it negligently failed to settle the claim against its insured or failed to settle the claim because of bad faith. Safeco contends that under Eastham v. Oregon Automobile Insurance Co., 273 Or. 600, 540 P.2d 364, rehearing denied, 273 Or. 610, 542 P.2d 895 (1975), its sole duty toward its insured was to act in good faith and that, therefore, the inclusion of a negligence standard in the jury instructions was error. We disagree. Although the Eastham decision analyzes the insurer's duty to settle a third party's claim against the insured in terms of "good faith," the Oregon Supreme Court, in denying a petition for rehearing in Eastham, made clear that there is little difference between the concepts of good faith and due care in the context of an insurer accepting or rejecting a settlement offer in a case where there is a likelihood of a verdict in excess of the policy limits. 542 P.2d at 896. See also Kriz v. Government Employees Insurance Co., 42 Or.App. 339, 600 P.2d 496, 500 (1979) ("It is well established that an insurer may be liable to its insured for the excess of a judgment over the limits of a liability policy if the insurer has failed, negligently or in bad faith, to settle the claim against the insured."). The district judge's challenged instruction, framed in terms of negligence or bad faith, was, therefore, correct.

Safeco's next argument is that the evidence is insufficient to support the verdict. Evidence supporting the $20,000 verdict against Safeco includes:

(1) Safeco's determination that Kabatoff was clearly liable for McElwain's injuries (2) Safeco's knowledge before trial that McElwain's injuries were substantial;

(3) McElwain's offer to settle his claim in full for $10,000, a sum well within the policy limits;

(4) Safeco's final settlement offer to McElwain of $6,500;

(5) Safeco's willingness, unbeknownst to McElwain, to increase the settlement offer to $8,200 if McElwain lowered his demand;

(6) Safeco's cash reserve of $22,500 on McElwain's claim;

(7) Expert testimony that McElwain's $10,000 settlement offer was reasonable and should have been accepted by a prudent insurer and that a jury verdict below $10,000 was improbable.

Both parties agree that the central question at trial was whether Safeco acted as though there were no policy limits applicable to the claim so that the risk of loss would presumably be borne by Safeco entirely. Put another way, Safeco is liable under the negligence/bad faith test if "the risks (to the insured) of unfavorable results were out of proportion to the chances of a favorable outcome (i. e., one within the policy limits)." Eastham, 540 P.2d at 367.

The facts summarized above provide an adequate basis for a jury to conclude that there was an unreasonable risk to...