Klingman v. National Indemnity Company, 14025.

• Decision Date: 29 May 1963
• Docket Number: No. 14025.,14025.
• Citation: 317 F.2d 850
• Parties: John KLINGMAN, Plaintiff-Appellant, v. NATIONAL INDEMNITY COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

317 F.2d 850 (1963)

John KLINGMAN, Plaintiff-Appellant, v. NATIONAL INDEMNITY COMPANY, Defendant-Appellee.

No. 14025.

United States Court of Appeals Seventh Circuit.

May 29, 1963.

Robert F. Pfiffner, Chippewa Falls, Wis., for appellant.

James T. Murray, Milwaukee, Wis. (Arnold, Murray & O'Neill, Milwaukee, Wis., of counsel), for defendant-appellee.

Before HASTINGS, Chief Judge, SCHNACKENBERG and KILEY, Circuit Judges.

HASTINGS, Chief Judge.

Plaintiff John Klingman brought this action against defendant National Indemnity Company (National) to recover damages occasioned by defendant's alleged bad faith in failing to settle within its policy limits a claim for personal injuries arising out of an automobile accident. Based on plaintiff's complaint, defendant's answer, defendant's motion for summary judgment and affidavits in support of and in opposition to such motion, the district court granted summary judgment,¹ dismissing plaintiff's complaint on the merits. This appeal followed.

The following facts appear from the pleadings and affidavits relied on by the district court in entering summary judgment.

On August 16, 1958, plaintiff, driving his own automobile, was involved in a collision with an automobile driven by Delima Mondor. Delima Mondor and her husband subsequently brought suit in the circuit court in St. Croix County, Wisconsin against Klingman and National as Klingman's insurer. Mrs. Mondor alleged that Klingman was negligent and sought to recover for personal injuries sustained as a result of the collision. Mr. Mondor, who was not involved in the accident, sought recovery for damages sustained by him as a result of his wife's injuries.²

After the Mondors' suit was commenced, but before trial, National notified Klingman that it would neither defend him nor afford coverage to him under its policy because of misrepresentations by Klingman in his application for the insurance. After National's refusal to defend him or afford coverage, Klingman hired an attorney to conduct the defense on his behalf in the state court action. National filed a separate answer denying the allegations of negligence and interposing an affirmative defense claiming the insurance policy was void because of Klingman's alleged misrepresentations in his application for the insurance.

Before and during the trial of the state court action, the Mondors offered to settle their claims for $10,000, the limit of National's liability under its insurance policy. Klingman in each instance demanded that National accept the offer and settle the claims, but National refused.

The issue of coverage raised by National's affirmative defense was tried to the court which found that National had no valid policy defense. The negligence issues were tried to the jury which found Klingman guilty of gross negligence and assessed 90% of the combined causal negligence to him and 10% to Mrs. Mondor. So far as relevant to the case at bar, judgment was entered for the Mondors in the state court actions in the aggregate sum of $36,150.85, of which $10,000 was against National and $26,150.85 was against Klingman.

On appeal to the Supreme Court of Wisconsin, the judgment against Klingman and National was affirmed. The trial court's holding that National had no valid policy defense was upheld. The jury's finding that Mrs. Mondor was guilty of 10% of the causal negligence was reversed on the ground that there was no evidence to support such a finding.³ Martell v. Klingman, 11 Wis.2d 296, 105 N.W.2d 446 (1960).

National satisfied the judgment against it. The judgment against Klingman in the amount of $26,150.85 remains unsatisfied, and he now seeks to recover this amount in the instant action.

It is the rule in Wisconsin that an insurer must exercise good faith in choosing to litigate a claim against its insured instead of accepting an offer of settlement within policy limits. Byrnes v. Phoenix Assurance Company of New York, 7 Cir., 303 F.2d 649 (1962); Berk v. Milwaukee Automobile Ins. Co., 245 Wis. 597, 15 N.W.2d 834 (1944).

In the case before us, plaintiff Klingman contends not only that defendant National was guilty of bad faith in refusing to settle the claim on its merits but also was guilty of bad faith in asserting the policy defense.

The question of whether an insurer owes an insured the duty of good faith in asserting a policy defense has not arisen in Wisconsin. It is a logical extension of the good faith rule to hold an insurer to such a duty. We conclude that under Wisconsin law an insurer must exercise good faith in asserting a policy defense which would defeat coverage instead of accepting an offer to settle a claim within its policy limits.

It is plaintiff Klingman's theory that defendant could not reasonably have concluded that it could prevail on its policy defense and was therefore guilty of bad faith in asserting this defense.

Klingman's application for insurance represented that he had had no prior driving convictions when in fact he had previously been convicted of speeding and reckless driving. The evidence in the state court action showed that the application for insurance was filled in by National's local agent. The agent did not recall asking the question concerning prior driving convictions. Klingman and the agent agreed that the application was not read to or by Klingman. National offered to prove that had the underwriting firm which passed upon its risks known of the prior convictions it might possibly have disapproved the issuance of the policy. This offer of proof was rejected by the state trial court, and the rejection was upheld on appeal. Martell v. Klingman, 11 Wis.2d 296, 105 N.W.2d 446 (1960). National was unable to produce testimony to the effect that had it known of the prior convictions it would not have issued the policy.

Thus National was unable to prove either that the misrepresentation was made with intent to deceive or that such misrepresentation served to increase the risk. Proof of one or the other of these factors was necessary to enable National to avoid coverage under its policy. Wis.Stat. § 209.06 (1961).

The strength or weakness of National's case on its policy defense is a factor to be considered in determining its good faith in asserting it. See Royal Transit v. Central Surety & Ins. Corporation, 7 Cir., 168 F.2d 345 (1948), cert. denied, 335 U.S. 844, 69 S.Ct. 68, 93 L.Ed. 395. We conclude that the ultimate issue — whether or not National exercised good faith in asserting the policy defense — is an issue of fact which, in the instant case, must be determined at a trial on the merits of this issue. We cannot say as a matter of law that National exercised good faith in asserting the policy defense.

We turn now to the issue of National's good faith in refusing to settle within the policy limits.

By his complaint in the instant action, plaintiff alleged that defendant knew prior to trial in the state court that he, Klingman, had been guilty of gross and ordinary negligence. The complaint further asserted that defendant was aware of the serious permanent injuries suffered by Mrs. Mondor. By its answer, defendant denied knowledge of any negligence whatsoever on the part of Klingman and denied knowledge of serious injuries. Defendant stated in its fourth defense that it concluded as a result of its investigation "that in the event John Klingman was negligent, such negligence was not as great as that of Delima Mondor."

The evidence produced in the state court trial tending to prove Klingman's negligence showed that he had had four or five brandies and some beer within five hours of the accident. A urine specimen was taken from Klingman shortly after the accident and analysis revealed the presence of .29% alcohol. This is well above the amount constituting prima facie evidence of being under the influence of intoxicants. Wis.Stat. § 325.235(1) (c) (1961).

The testimony in the state court action showed that the impact occurred in Mrs. Mondor's lane of travel. Debris and gouge marks were on the highway in her lane of travel. Klingman stated that he had swerved to his left. Mrs. Mondor testified that Klingman swerved into her lane when the vehicles were about 50 to 60 feet apart. A police officer...