Manchester Ins. & Indem. Co. v. Grundy

• Decision Date: 19 September 1975
• Citation: 531 S.W.2d 493
• Parties: MANCHESTER INSURANCE & INDEMNITY COMPANY, Appellant, v. Anthony GRUNDY et al., Appellees.
• Court: United States State Supreme Court — District of Kentucky

Page 493

531 S.W.2d 493

MANCHESTER INSURANCE & INDEMNITY COMPANY, Appellant, v. Anthony GRUNDY et al., Appellees.

Court of Appeals of Kentucky.

Sept. 19, 1975.

Rehearing Denied Feb. 6, 1976.

James Levin, Levin & Yussman, Louisville, for appellant.

Joe G. Leibson, Louisville, for appellees.

STEPHENSON, Justice.

A Jefferson Circuit Court jury returned a verdict against Manchester Insurance & Indemnity Company based on 'bad faith' in failing to settle a claim against its insured. Manchester appeals; we reverse.

Manchester issued an automobile insurance policy to Carl Weaver. The policy provided bodily injury coverage limited to $10,000 for one person. The accident which brought about this litigation occurred when an automobile operated by Weaver on a street in the city of Louisville struck the rear of an automobile being operated by a Richard Humphrey. The Humphrey automobile struck Grundy, a pedestrian, who was standing on a sidewalk. Grundy filed suit against Weaver, who filed a third-party complaint against Humphrey. Weaver stated that the Humphrey car gave no signal by lights or otherwise; that the automobile was stopping or turning; and that the impact when he struck the Humphrey car was not of sufficient force to propel the Humphrey car against Grundy.

The injury sustained by Grundy consisted of multiple-compound fractures of the left leg. Some seven months later, Grundy resumed his full-work activities with no permanent disability or impairment although still suffering from some pain and swelling in the leg. One month later, a surgical procedure for the removal of a Lotte's nail, which was used in reduction of the fracture, was successfully performed necessitating a brief hospital stay. The total medical expense was $1,286.45 with lost earnings of $1,907.20.

The trial court directed a verdict against Weaver, submitting to the jury the issue of whether Humphrey contributed to the accident by his negligence. The jury returned a verdict of $20,000 against Weaver. Later Grundy brought suit against Manchester to recover the excess alleging that Manchester was guilty of 'bad faith' in failing to settle Grundy's claim, pleading an assignment from Weaver of Weaver's rights against Manchester. Grundy v. Manchester Insurance & Indemnity Co., Ky., 425 S.W.2d 735 (1968), upheld the validity of the assignment from Weaver to Grundy with directions to hear evidence and try on the merits.

From the evidence introduced at the trial on the issue of 'bad faith' in refusing to settle within the policy limits, it appears that Manchester sent Weaver a standard letter advising that Grundy's claim exceeded the limits of the policy and advising that he could employ counsel to defend the excess over the policy limits. Weaver consulted an attorney but did not employ him to defend. In preparation for trial of the damage suit, Weaver and a representative of Manchester visited the scene of the accident; and the record does not disclose that Weaver ever expressed any dissatisfaction with the manner in which the case was handled by Manchester. There is a conflict in the evidence as to whether Weaver was kept advised of the negotiations for settlement. Weaver did not make a demand that Manchester settle the claim within policy limits. As to negotiations for a settlement of the claim, some months after the accident suit was filed against Weaver, Grundy's attorney forwarded a curious letter to Manchester's representative demanding that Manchester settle for the policy limits and reciting that 'refusal upon the part of your company to settle within policy limits would be tantamount to an act of bad faith against my client as well as Weaver, the insured' and that if a judgment was obtained in excess of the policy limits, 'will make every effort to collect the full judgment against the insurance company based upon their bad faith in not accepting this settlement proposal.'

Manchester later made an offer of $5,000 to settle, but it was refused with a statement that only the policy limits would settle the case. On the morning of the second day of the trial after the testimony was completed, the jury instructed, and before the closing argument, Manchester offered to settle the case for $7,500. This offer was refused with a counter offer of settlement for $9,500 which was not accepted.

The evidence shows that while the jury was deliberating there was a conversation between Grundy's lawyers and Manchester's lawyer and representative to the effect that Manchester declined to offer more than $7,500 in settlement since that was all the case was worth and because of the state of Kentucky case law on the subject Grundy could never collect more from Manchester. Grundy presented two witnesses. One witness, a claims representative for another insurance company, testified that he would value the injuries for settlement purposes at approximately $25,000 because of the extent of the injuries, the absolute liability of Weaver, and the circumstances of the accident. The other witness for Grundy, a lawyer for a Louisville utility, testified that for settlement purposes he would value the case at $18,500 to $25,000 and would have settled because of the directed verdict.

Manchester introduced a witness, a lawyer for a public utility and another insurance company, who testified that he would value the case for settlement purposes from $8,000 to $12,000 and further testified that in his opinion it would not be reasonably certain that a jury in Louisville would return a verdict in excess of $10,000.

The jury found a verdict for Grundy under the following instruction given by the trial court:

'(1) If the jury believe from the evidence that the conduct of Manchester Insurance and Indemnity Co., referred to hereafter as Manchester, in negotiating about and failing to settle the claim of Anthony Grundy in March of 1965 for the amount of the policy limit was of such arbitrary and represensible nature as to constitute bad faith, meaning conscious doing of a wrong or breaching of a known duty for some motive of interest or ill will, and if the jury shall further believe from the evidence that the facts and circumstances of the accident known to Manchester, or which should have been known by Manchester in the exercise of due diligence on its part, were such as to cause the defendant, Manchester, reasonably to conclude and believe that a verdict against Carl Weaver on a trial of the issue of liability was probable and that a verdict and judgment would probably be returned against Weaver exceeding the policy limit of $10,000.00, you will find for plaintiffs against the defendant, Manchester, but, unless you so believe or if you believe as set out in Instruction No. 2, you will find for the defendant.' (Emphasis ours)

This appeal brings us to a consideration of the proper application of a test to determine 'bad faith' on the part of an insurance company in failing to settle a claim. The perplexity of the problem and the confusion that abounds in this area among the several jurisdictions are illustrated by 44 Am.Jur.2d, Insurance, § 1530:

'Liability or indemnity insurance policies ordinarily reserve to the insurer the decision whether an offer to compromise a claim against the insured should be accepted. It is apparent, therefore, that a conflict in the interests of the insurer and the insured may arise where there is an action or claim against the insured for an amount in excess of the policy coverage and an offer to compromise this claim for the policy limit or a figure slightly below such limit. While a number of the earlier cases apparently support the rule that a liability insurer is under no duty to consider the insured's interest in accepting or rejecting a compromise offer, and, on the other hand, it has occasionally been contended that such an insurer has an absolute duty to accept any offer to settle for an amount within the policy coverage, and rejects such an offer at its own risk, the vast majority of the courts have held, and it is probably the accepted rule in most if not all jurisdictions at this time, that the insurer is bound to give some consideration to the insured's interest in such a situation. But though the courts are now thus agreed, there is a pronounced split in the decisions upon the question whether the insurer's obligation is only to act in 'good faith' to the insured in considering such an offer, or whether it is required to exercise 'due care' and is liable for a negligent rejection of the compromise. In the great majority of the cases passing upon the question, the courts have held that a liability insurer, having assumed control of the right of settlement of claims against the insured, may become liable in excess of its undertaking under the policy provisions if it fails to exercise 'good faith' in considering offers to compromise the claim for an amount within the policy limits. However, a number of courts considering the liability of an insurer for rejecting an offer to compromise a claim against its insured for an amount within the limits of the policy coverage have rejected the rule that the insurer's duty is limited to the exercise of good faith toward the insured, and have held that there might be liability for negligence in rejecting a reasonable compromise offer.

'No single satisfactory test has been formulated as to just what degree of consideration for the insured's interest is entailed by the requirement of 'good faith' as adopted in the majority of jurisdictions. Some of the courts have indicated that in the absence of actual fraud or misrepresentation the insurer is entitled to regard its own interests as paramount; others have said that the insured's interest must be given equal consideration, while at least one court has said that in the event of a conflict of interests the insured's interest must be given priority. Similarly, under the 'negligence test,' while the courts which have expressly adopted this...