Maryland Casualty Co. v. Cook-O'Brien Const. Co.

• Decision Date: 27 February 1934
• Docket Number: No. 9724.,9724.
• Citation: 69 F.2d 462
• Parties: MARYLAND CASUALTY CO. v. COOK-O'BRIEN CONST. CO.
• Court: U.S. Court of Appeals — Eighth Circuit

69 F.2d 462 (1934)

MARYLAND CASUALTY CO. v. COOK-O'BRIEN CONST. CO.^*

No. 9724.

Circuit Court of Appeals, Eighth Circuit.

February 27, 1934.

Spencer F. Harris, of Kansas City, Mo. (Paul G. Koontz, of Kansas City, Mo., on the brief), for appellant.

Floyd E. Jacobs, of Kansas City, Mo. (M. J. Henderson and Thomas E. Deacy, both of Kansas City, Mo., on the brief), for appellee.

Before GARDNER and WOODROUGH, Circuit Judges, and MARTINEAU, District Judge.

WOODROUGH, Circuit Judge.

The Cook-O'Brien Construction Company, being engaged in the work of laying water mains in the vicinity of Flagstaff, Ariz., took out two employers' liability policies with the Maryland Casualty Company covering liability for personal injuries to employees; the total liability on account of injury to any one person being limited to $5,000 costs and interest.

While the policies were in force, and on June 23, 1925, one L. L. Crawford was injured on the work as a result of a premature explosion of blasting dynamite, and in October, some four months after the accident, brought suit against the construction company for his injuries, praying judgment for $25,000 general damages and $175,000 special damages. The case was defended for the construction company by the casualty company, and upon a second trial Crawford recovered judgment for something over $12,000. The judgment was appealed to the Circuit Court of Appeals of the Ninth Circuit, affirmed and certiorari to the Supreme Court denied. The appellant, Maryland Casualty Company, went on the bond to effect supersedeas during the appeal; the construction company agreeing to indemnify. This suit was brought by the casualty company against the construction company upon the indemnity agreement given by the construction company as part consideration for execution of the supersedeas bond by the casualty company. The casualty company alleged that, after the affirmance of the judgment in favor of Crawford, it had been compelled to and had made full payment of the judgment, and was therefore entitled to recover on the indemnity agreement for the excess of the judgment paid over the limit of the policy.

To this cause of action there was no direct valid defense on the part of the construction company, and the trial court gave peremptory instruction that the casualty company was entitled to recover thereon, and there is no controversy presented here concerning it. The controversy here is related entirely to the set-off which was pleaded by the construction company. In its set-off the construction company alleged that, upon the happening of the accident to Crawford, the casualty company was promptly notified and became bound as provided in the policies to "indemnify the Construction Company against loss by reason of the liability imposed upon it by law for damages on account of such injuries," and "to serve the Construction Company by investigation and by settlement of any resulting claim in accordance with law," and "to defend any suits which may at any time be instituted * * * although such are wholly groundless, false or fraudulent," and "to pay all costs taxed against the Construction Company in any legal proceeding defended by the Casualty Company, all interest accrued after entry of judgment, and all expenses incurred by the Casualty Company for investigations, negotiations for settlement, or defense of claims or suits," and "to pay the cost of such immediate surgical relief as is imperative at the time of the accident," and "the Casualty Company was not responsible for any settlement made or expenses incurred by the assured unless such settlement or expenditures were first specifically authorized in writing by the Company, except that the assured may provide at the time of the accident at the expense of the Company, such surgical relief as is imperative."

The construction company further alleged that, immediately after the injuries to said Crawford, the casualty company, its agents, servants and employees, took charge of the Crawford claim and the investigation thereof and subsequently the defense of the suit predicated thereon. That its agents, servants and employees ascertained before any suit was filed by Crawford that Crawford was seriously injured and that such injuries were beyond dispute; that the liability to Crawford on the part of the construction company was dangerous; that, if a settlement was not made, in all likelihood and probability a verdict in excess of the protection afforded by the policies of insurance would be secured by Crawford; that Crawford offered to, and was at all times prior to the trial of his suit and recovery of his first verdict (about $13,000) willing to, and offering to, settle his claim with the casualty company for a sum substantially less than the $5,000 policy limit; but that the casualty company, through its agents, acting in bad faith in its relations with the construction company, refused to make any offer of settlement to Crawford, and in bad faith made no attempt to effect settlement, and in bad faith made no settlement; and that it was in consequence of such bad faith on the part of the casualty company that the excess judgment obligation paid and sought to be recovered by the casualty company accrued.

The construction company also pleaded in its set-off that the casualty company, through its attorneys and agents, had been guilty of bad faith and negligence in the conduct of the defense for the construction company upon the two trials of the Crawford case, contributing to the loss. But, on the conclusion of all the evidence, the trial court announced its decision that the testimony was not sufficient to submit the claim of bad faith or negligence on the part of the casualty company in the conduct of the trials to the jury, and there after instructed the jury in favor of the casualty company against the construction company upon that issue.

It also instructed, as the only issue for the jury raised by the set-off, that, if the jury should find that the casualty company had declined and refused to effect a reasonable settlement of the Crawford claim or suit, having opportunity to make such reasonable settlement within the limit of the policy, and "that in so declining and refusing to effect such a settlement the Casualty Company was acting not in good faith toward the Cook-O'Brien Construction Company, but in bad faith as to the Cook-O'Brien Construction Company, a verdict against the Casualty Company on the set-off would be justified." Such verdict was returned completely offsetting the cause of action sued on by the casualty company; there was judgment thereon; and the casualty company appeals.

Error is assigned on the receipt of testimony claimed to have been incompetent; on the giving and refusal to give instructions to the jury; on sustaining the right to plead the set-off; and on the denial of motion for a directed verdict.

The trial court held, as reflected by rulings and instructions to the jury, that, where an insurance company agrees to indemnify against loss from personal injury claims conditioned upon the insured's surrendering control of investigations, adjustments of claims, and defense of lawsuits to the insurance company, and where the insurance company does, pursuant to such contract, take control of the investigation, adjustment of claims, and defense of lawsuits out of the policyholder's hands, assuming exclusive control, a relationship necessarily arises between the insured and the insurer which imposes on the insurer a duty owing to the insured to exercise skill and care and good faith to the end of saving the insured harmless, as contemplated by the contract to indemnify; that the discharge of the duty involves discretion and judgment and requires that the insurer make full investigation of the circumstances surrounding the accident and of the incidents of legal liability applicable where the accident occurred, and that it must act honestly to effectually indemnify and save the insured harmless as it has contracted to do — to the extent, if necessary, that it must make whatever payment and settlement an honest judgment and discretion dictates, within the limitation of the policy. We think the weight of authority sanctions the view of the trial court, and we approve the statement of the law embodied in the court's instructions as follows:

"If you find that although there was an opportunity to make a reasonable settlement and although there was a probability, under all the facts and circumstances then known or which should have been known, that a judgment might ultimately be had against the Cook-O'Brien Construction Company in excess of the coverage (of the policy), even if you find those facts to be true, if you find that the Maryland Casualty Company did not, in bad faith toward the Cook-O'Brien Construction Company, decline or refuse to make a settlement, then in either of those events your verdict should be for the * * * Maryland Casualty Company." "You can not find against the Maryland Casualty Company upon this issue merely because you think a mistake was made by that Company in not effecting a settlement." "You can only find against it if you find it was guilty of bad faith toward the Cook-O'Brien Construction Company." "You must understand that the Maryland Casualty Company did not agree to settle any claim." "It wasn't bound to settle any claim. It had the right to settle claims if in its discretion that was a wise and proper course, but that discretion was not one which was an absolute discretion. It could not, under all circumstances and in all cases refuse to settle a claim and go on and try the case. Its discretion was not that wide. It must exercise good faith toward the Cook-O'Brien Company in the matter of effecting settlements." American Mutual Liability Co. v. Cooper (C. C. A.) 61 F. (2d) 446; Hilker v. Western Auto Ins. Co., 204 Wis. 1, 231 N. W. 257, 235 N. W. 413; New Orleans & C. R. Co. v....