Lange v. Fidelity & Casualty Company of New York

• Decision Date: 02 April 1971
• Docket Number: No. 42489,42489
• Citation: 290 Minn. 61,185 N.W.2d 881
• Parties: Steven Z. LANGE, receiver, Respondent, v. FIDELITY & CASUALTY COMPANY OF NEW YORK, Appellant.
• Court: Minnesota Supreme Court

Page 881

185 N.W.2d 881

290 Minn. 61

Steven Z. LANGE, receiver, Respondent, v. FIDELITY & CASUALTY COMPANY OF NEW YORK, Appellant.

No. 42489.

Supreme Court of Minnesota.

April 2, 1971.

Syllabus by the Court

1. A liability insurer which assumes control of the right of settlement of a claim against its insured under a policy which gives it the exclusive right to defend and settle may become liable in excess of its policy limits if it fails to exercise 'good faith' in considering an offer to settle the claim within the policy limits.

2. The duty to exercise 'good faith' with respect to the decision whether to accept an offer of settlement within the policy limits requires the insurer to view the situation as it would if there were no policy limits applicable to the claim, including the obligation to give equal consideration to the financial exposure of both the insured, whether solvent or insolvent, and the insurer, and the obligation to inform the insured, in the manner in which he would be advised if he consulted private counsel, in detail of the potential consequences of a deficiency judgment and of the potential conflict between the interests of the insurer and the insured.

3. Evidence supported finding of the trial court that defendant liability insurer acted in 'bad faith' in refusing to settle a verdict of $29,000 in a personal-injury action against its insured for the $25,000 limit of its automobile liability policy.

4. Plaintiff, acting as a statutory receiver appointed in proceedings supplementary to execution of a deficiency judgment against the insured, is entitled to assert a claim for 'bad faith' refusal to settle against defendant insurer despite the insured's refusal to do so.

Lasley, Foster & Roehrdanz, Minneapolis, for appellant.

Dorfman, Rudquist & Karalis, Minneapolis, for respondent.

Heard before KNUTSON, C.J., and NELSON, OTIS, ROGOSHESKE, and ODDEN, JJ.

OPINION

ROGOSHESKE, Justice.

The issues on this appeal from a judgment are whether the trial court erred (1) in finding that defendant, Fidelity & Casualty Company of New York, acted in 'bad faith' in refusing to settle a personal-injury action against its insured for the limits of its automobile liability policy; and (2) in determining that plaintiff, a receiver appointed in statutory proceedings supplementary to execution of a deficiency judgment against the insured, is entitled to assert the claim against defendant insurer despite the insured's refusal to do so.

On October 29, 1959, defendant's insured, William Martin, was involved in a three-car accident in Minneapolis. Following the accident, Frank Duffy brought a personal-injury action in district court against Martin, seeking damages in excess of $25,000 upon the claim that Martin's negligence was the cause of the accident and his injuries. At the time of the accident, Martin carried an automobile liability insurance policy with defendant, Fidelity & Casualty Company, with policy limits of $25,000. Defendant undertook the defense of Duffy's action on Martin's behalf, assuming, pursuant to the policy and with Martin's consent, the exclusive right to defend or settle the action. During the pendency of the suit, Martin brought a third-party action for contribution against W. R. Johnson claiming that Johnson's negligence caused the accident. Duffy did not assert a claim against Johnson.

The case was tried to a jury which, on January 23, 1962, returned a verdict in favor of Duffy against Martin for $35,000 and for contribution of one-half the verdict in favor of Martin against Johnson. Thereafter, Martin moved for a new trial on the issue of damages; Johnson moved for judgment notwithstanding the verdict or in the alternative for a new trial on all the issues. On April 14, 1962, the trial judge issued an order denying Martin's motion but granting Johnson's motion for a new trial on condition that if Duffy accepted a reduction in his verdict to $29,000 Johnson's motion for a new trial would be denied. On April 18, 1962, Duffy consented to a reduction of the verdict to $29,000 and served notice of entry and filing of the judge's order.

Thereafter Duffy, through his counsel, offered to accept from Martin the policy limits of $25,000 in full settlement of Duffy's verdict of $29,000. Although defense counsel for insurer, acting on Martin's behalf, did not intend to appeal from the denial of its motion for a new trial on the issue of damages, it did not accept this offer and indicated that the company wanted to negotiate a settlement of Duffy's verdict below its $25,000 policy limits. Counsel was also negotiating at this time with Johnson's insurer in an attempt to settle the contribution verdict.

Duffy entered judgment on his verdict against Martin on June 14, 1962.

Defendant-insurer's counsel, acting on Martin's behalf, did not appeal from either the judge's order denying his motion for a new trial or from the judgment. Johnson appealed from the order denying his alternate motions. In Duffy v. Martin, 265 Minn. 248, 121 N.W.2d 343, we granted Johnson a new trial on the issue of liability.

Thereafter, defendant insurer paid $25,000 plus interest and costs on Duffy's judgment.

The retrial of the contribution action was commenced on April 15, 1965. Defendant insurer was substituted for Martin as the real party in interest with the specific understanding that Martin would also be given the benefit of a favorable verdict from the jury on Johnson's liability. After one day's testimony, defendant insurer settled its contribution claim against Johnson for $4,000, which amount was paid to and retained by defendant insurer. The settlement provided that it was without prejudice to Martin's reassertion of his individual claim for contribution from Johnson in case Martin ever paid the excess portion of Duffy's verdict himself.

On May 21, 1966, Duffy, in proceedings supplementary to execution of the judgment, subpoenaed Martin for an examination concerning his assets. This examination disclosed that Martin owned an automobile and was earning $150 per month in addition to receiving social security benefits. He lived in a house which his wife owned. He was regarded as judgment-proof, and the excess judgment of $4,000 remained unsatisfied.

Duffy then attempted to persuade Martin to commence an action against defendant for 'bad faith' refusal to settle with Duffy for $25,000, but Martin refused to do this. Duffy then moved the court for appointment of a receiver to prosecute Martin's cause of action. On July 26, 1967, the court, on Duffy's petition, pursuant to Minn.St. 575.05, appointed plaintiff, Steven Lange, receiver. Lange retained Duffy's counsel to represent him in the present action.

The case was tried before the district court without a jury on January 22, 1970. The court made findings against defendant insurer and ordered judgment on plaintiff's behalf for $4,000 plus interest from January 23, 1962.

Defendant appeals from the judgment.

1--2--3. The rule in Minnesota is that the insurer must exercise good faith in considering settlement offers. ¹ As stated in Larson v. Anchor Cas. Co., 249 Minn. 339, 340, 82 N.W.2d 376, 378, 'there must be bad faith on the part of the insurer with resulting injury to the insured before there can be a cause of action against the insurer for the excess over its undertaking.' Recently, in Herges v. Western Cas. & Surety Co. (8 Cir.) 408 F.2d 1157, 1164, the court, applying Minnesota law, discussed the good-faith test in detail. It said, and we agree:

'* * * It requires that the defense be evaluated in terms of the reasonable expectations that that defense will prevail and amount of the verdict if it does not. The settlement offers must then be viewed in light of those expectations, with equal consideration being given to the financial exposure of both the insured and insurer.'

The combination of the equal-consideration and good-faith aspects of the rule may be stated as follows:

'With respect to the decision whether to settle or try the case, the insurance company must in good faith view the situation as it would if there were no policy limit applicable to the claim.' ²

In determining whether there is sufficient evidence to support the trial court's finding that defendant, in refusing to settle, acted in 'bad faith' without giving equal consideration to insured's interests, we are guided by the rule that findings of facts by the trial court may not be set aside unless clearly erroneous. Rule 52.01, Rules of Civil Procedure. Obviously, the trial court, in finding that defendant acted in bad faith without giving equal consideration to the insured's interests, determined that defendant would not have rejected the settlement offer if there had been no policy limit applicable. We hold there is sufficient evidence to support the findings.

First, there was no reasonable tactical or economic consideration justifying defendant's refusal to accept Duffy's offer to settle for the policy limits. The only justification advanced by defendant is that after the post-trial motions were denied and Johnson, the third-party tort-feasor, perfected his appeal to the supreme court, the judgment stood at $29,000,...