Luke v. American Family Mutual Insurance Company, 71-1348

• Decision Date: 02 November 1972
• Docket Number: 71-1374.,No. 71-1348,71-1348
• Citation: 476 F.2d 1015
• Parties: Larry LUKE, Individually, et al., Appellants, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Appellee. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Appellant, v. Larry LUKE, Individually, et al., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

476 F.2d 1015 (1973)

Larry LUKE, Individually, et al., Appellants, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Appellee.

AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Appellant, v. Larry LUKE, Individually, et al., Appellees.

Nos. 71-1348, 71-1374.

United States Court of Appeals, Eighth Circuit.

Submitted June 12, 1972.

Decided November 2, 1972.

Submitted March 12, 1973.

On Rehearing April 16, 1973.

Rehearings Denied May 21, 1973.

Gerald L. Reade and John R. Kabeiseman, Yankton, S. D., for Luke.

J. B. Shultz, Sioux Falls, S. D., for American Family Mut. Ins. Co.

Before VAN OOSTERHOUT, Senior Circuit Judge, and LAY and HEANEY, Circuit Judges.

On Rehearing En Banc April 16, 1973.

LAY, Circuit Judge.

The plaintiffs, Larry Luke, individually and as the administrator of the estate of Lisa Luke, and Kathleen Luke, are the assignees of the insured, Herbert Carl Llewellyn, and the holders of judgments totaling $138,840.12 plus interest, costs and attorney fees against Llewellyn.

The plaintiffs alleged that American Family wrongfully denied coverage under its policy with Llewellyn. Plaintiffs further charged that the company in bad faith failed to settle within the policy limits of its insured's policy. Both parties moved for summary judgment. The trial court found that coverage existed but refused to allow damages in excess of the policy limits. 325 F.Supp. 1330 (D.S.D.1971). Cross appeals followed. The insurance carrier contests the finding of coverage, and the plaintiffs appeal from the denial of the damages over the policy limits. We affirm the trial court's finding that coverage should have been afforded the insured, however, we find that the insurer was liable for the full amount of the judgment in excess of its policy limits. We deny plaintiffs their requested attorney fees.

The insured owned a 1966 Pontiac which was covered by American Family's liability policy No. 40-054467. On October 15, 1966, while the 1966 Pontiac was in possession of the insured's estranged wife, Llewellyn purchased for $460 under a conditional sales agreement a 1959 Oldsmobile for his use from Wilson Motor Company of Sioux City, Iowa. An Iowa certificate of title was issued in Llewellyn's name with the car dealer holding it for security. Llewellyn made no effort to insure this car.

On January 15, the Oldsmobile became disabled with engine trouble, and Llewellyn had Wilson Motor tow the car to their garage. Llewellyn still owed $350 on the purchase price. On January 31, 1967, Wilson Motor Co. legally repossessed the Oldsmobile and transferred the title back to its name, however, Llewellyn could have reacquired the title by payment of the contract balance before February 9, 1967. Wilson Motor Co. later sold the car for salvage. On January 16, the day after Llewellyn had Wilson Motor tow in his Oldsmobile, he purchased a 1967 Pontiac from another car dealer in Sioux City. On February 4, 1967, Llewellyn, while intoxicated and driving on the wrong side of the road, was involved in the accident with the Luke family. He was subsequently convicted for manslaughter and sent to prison.

The basic issue as to coverage concerns the "newly acquired automobile" clause under Llewellyn's insurance contract with American Family. The clause reads:

"Owned automobile means . . . b. a private passenger or utility automobile ownership of which is acquired by the named insured during the policy period, provided the named insured within 30 days after its acquisition notifies the company thereof and of his election to make the insurance afforded by this and no other policy . . . issued by the company applicable to such automobile and . . . (2) the company insures under the Liability Coverage, all private passenger and utility automobiles owned by the named insured on the day of its acquisition . . . ." (Emphasis ours.)

American Family denied coverage arguing that Llewellyn was still the legal title holder to the uninsured Oldsmobile on the date of acquisition of the 1967 Pontiac, therefore, it did not insure all automobiles owned by the insured on that date. As a result automatic coverage of the 1967 Pontiac was not afforded.

The district court held that the 1967 Pontiac was covered under the policy since the 1959 Oldsmobile was not an "owned" automobile within the meaning of the "newly acquired automobile" provision at the time the 1967 Pontiac was purchased. We affirm this ruling.

American Family contends that the construction of the newly acquired automobile clause is controlled strictly by the Iowa Certificate of Title statute; ¹ however, the trial court, citing Canal Insurance Company v. Brooks, 201 F.Supp. 124, 128 (W.D.La.1962), aff'd, 309 F.2d 751 (5 Cir. 1962), held that "the phrase `all private passenger and utility automobiles owned by the named insured' contained in this policy 'does not contemplate a vehicle which is in such a position or condition that a reasonable person would not include it in a policy of public liability insurance.'" 325 F. Supp. at 1332.

Other courts construing the same provision have almost uniformly defined an owned automobile within the policy coverage as an operable automobile, one capable of being used on the streets and highways. See e. g., Glens Falls Insurance Company v. Gray, 386 F.2d 520 (5 Cir. 1967); Patrick v. State Farm Mutual Automobile Insurance Company, 90 N.J.Super. 442, 217 A.2d 909, 912-913 (1966); cf. Lynam v. Employers' Liability Assurance Corp., 218 F.Supp. 383, 385 (D.Del.1963), aff'd 331 F.2d 757 (3 Cir. 1964). The ownership of an automobile which is junk or needs major repairs can hardly be thought to be ownership for liability insurance purposes "since the principal purpose of such insurance is to provide coverage for an automobile which is to be driven and which may become involved in an accident or other mishap." Glens Falls Insurance Company v. Gray, supra 386 F.2d at 524-525. Cases which have differed from this view have usually done so where the car is temporarily inoperable and is being repaired for future service. Williams v. Standard Accident Insurance Company, 158 Cal.App.2d 506, 322 P.2d 1026 (Cal.App.1958); cf. Allstate Insurance Company v. Stevens, 445 F.2d 845 (9 Cir. 1971).

The 1959 Oldsmobile in the present case was disabled with engine trouble; in fact, Wilson Motor was able to sell it for only $75 to a salvage dealer (the car was "junked out"). After January 15 the Oldsmobile was at all times in the possession of Wilson Motor, and Llewellyn showed no intention of reclaiming it. Moreover, on the day following the vehicle's failure Llewellyn unsuccessfully attempted to purchase a replacement automobile from Wilson Motor, and later that day he bought the 1967 Pontiac from another dealer. Thus, we agree with the trial court that a reasonable construction of American Family's policy would not include the inoperable and abandoned Oldsmobile as an owned automobile.²

LIABILITY FOR EXCESS DAMAGES

The district court found that American Family exercised good faith in refusing to provide coverage and therefore was not liable for damages over the limits afforded. In Kunkel v. United Security Insurance Company of New Jersey, 84 S.D. 116, 168 N.W.2d 723, 726 (1969), the Supreme Court of South Dakota, in passing on the question of liability of an insurance carrier for excess damages in refusing to settle within policy limits, stated:

"The trial court submitted the matter to the jury under the bad faith rule which we believe to be the better rule and the one prevailing in the majority of jurisdictions and we approve it. . . . However, . . . the character and extent of the insurer\'s negligence are factors to be considered by the trier of fact in determining if there is bad faith. The insured has the burden of establishing his claim by a preponderance of the evidence."³

The federal district court acknowledged two lines of authorities, one holding that good faith in refusing to defend is not a valid defense in an excess action where there has been a reasonable offer to settle,⁴ and the other line of cases holding a good faith decision in refusing to defend does constitute a defense to an excess action even when accompanied by a refusal to settle within policy limits.⁵ The trial court observed that the issue was one of first impression in South Dakota and concluded that the South Dakota Supreme Court would apply the Kunkel good faith test to the present situation. The district court then found that the carrier was in good faith in initially refusing coverage and therefore denied liability for damages in excess of the contract coverage afforded.

Although this court gives special weight to the determination of local law by a federal district judge, a court of appeals cannot be irrevocably bound by a district judge's choice of one of two or more alternative rules to follow in a diversity case.⁶ To hold otherwise would be to abdicate our appellate responsibility.

In the instant case American Family was presented with several demands by the plaintiffs and its assured to settle the three cases for $49,000 which was within the limits of the $25,000-50,000 policy. These demands were repeatedly ignored. At one time the plaintiffs offered to hold their suits in abeyance to provide the company an opportunity to file a declaratory judgment suit to determine whether coverage was provided. Although the liability of the company's assured was clear, and the potential damages for the wrongful death of the infant and for the serious injuries to the other plaintiffs were obviously greater than the policy limits, the company refused to consider both settlement and declaratory relief.

The rule announced by the South Dakota court in Kunkel is not apposite in determining the precise problem before us. Kunkel involved an insurer who assumed its obligation to defend its assured but exercised bad faith in refusing to settle within the policy limits. There exists an important difference between the...