Myers v. Ambassador Ins. Co., Inc.

• Citation: 146 Vt. 552,508 A.2d 689
• Decision Date: 07 February 1986
• Docket Number: No. 83-626,83-626
• Court: United States State Supreme Court of Vermont
• Parties: Rodney MYERS d/b/a Benway's North End Taxi v. AMBASSADOR INSURANCE CO., INC.

Page 689

508 A.2d 689

146 Vt. 552

Rodney MYERS d/b/a Benway's North End Taxi v. AMBASSADOR INSURANCE CO., INC.

No. 83-626.

Supreme Court of Vermont.

Feb. 7, 1986.

Latham, Eastman, Schweyer & Tetzlaff, Burlington, for plaintiff-appellant.

William W. Pearson, of Downs Rachlin & Martin, South Burlington, for defendant-appellee.

Before ALLEN, C.J., and HILL, PECK, GIBSON and HAYES, JJ. ^*

ALLEN, Chief Justice.

The plaintiff (insured) appeals from the dismissal of his complaint against the defendant (insurer) in which he seeks the amount he paid to satisfy a judgment rendered against him which was greater than the monetary limits of his liability insurance coverage, together with interest, costs and attorney's fees.

The insured contends that the insurer acted in bad faith as a matter of law by refusing to settle the underlying lawsuit within the limit of his policy and by not advising him of matters critical to his exposure, thereby depriving him of the opportunity to protect his uninsured interests. The trial court concluded that there was insufficient evidence to support a showing of bad faith and entered judgment for the defendant. We reverse and remand.

The insured was the owner of a number of taxicabs. One of the cabs struck and injured a pedestrian, who then instituted a negligence action against the driver of the cab and the insured. The insured gave timely notice of the accident and lawsuit to the insurer, which retained an attorney to represent both the insured and the driver.

The insured had contracted with the insurer for liability coverage with limits of $10,000 for bodily injury to any one person. The ad damnum of the pedestrian's original complaint was in the amount of $15,000, and the attorney retained by the insurer to defend that lawsuit sent the insured a letter advising him that the "claim" exceeded the coverage. This letter informed the insured that he had potential exposure in excess of the policy's coverage, and that he might wish to consider hiring outside counsel to protect his uninsured interest. The insured decided not to hire another attorney to protect his interests based on his determination that "it simply was not worth it," and that the chances were "slim" that a jury verdict would be as high as $15,000.

The attorney investigated the claim and conducted discovery to determine its value. Settlement negotiations were entered into, hovering between $2,500 and $3,500 until shortly before trial, when the plaintiff's demand was raised to $9,000. Immediately prior to trial, the plaintiff moved to amend his complaint to raise the ad damnum to $300,000. The motion was granted; trial ensued and the jury returned a verdict of $45,000. An appeal was taken, and this Court affirmed the jury verdict and judgment against the insured. English v. Myers, 142 Vt. 144, 454 A.2d 251 (1982). The insurer paid the policy limit plus interest on that amount, and the insured paid the sum of $36,966.62 to satisfy the judgment. The insured now seeks to recover the amount of his excess payment, along with interest, costs and attorney's fees.

The legal principles governing a claim of insurer bad faith arise out of the insurance company's control of the settlement of a claim brought against the insured. Under the policy provisions, the insured surrenders to the insurer the complete control and management of the lawsuit up to the limit of the policy coverage. Johnson v. Hardware Mutual Casualty Co., 109 Vt. 481, 490, 1 A.2d 817, 820 (1938). " 'Since the company ... has the power, through the control of settlement, to adversely affect the insured's interests, it must necessarily bear a legal responsibility for the proper exercise of that power.' " Brown v. United States Fidelity & Guaranty Co., 314 F.2d 675, 678 (2d Cir. 1963) (quoting Harris v. Standard Accident & Insurance Co., 191 F. Supp. 538, 540 (S.D.N.Y.), rev'd on other grounds, 297 F.2d 627 (2d Cir.1961), cert. denied, 369 U.S. 843, 82 S.Ct. 875, 7 L.Ed.2d 847 (1962)).

A conflict of interest is inherent in the insurer's control of settlement when, as in this case, there is potential exposure in excess of the policy limits. A settlement demand within the policy limits highlights that conflict, inasmuch as it will be in the insured's interest for that demand to be met. Such a settlement is not necessarily in the insurer's best interest, however, for by going to trial the insurer might be able to avoid liability altogether, or obtain a judgment for an amount less than the demand. 14 G. Couch on Insurance 2d § 51:132 (rev. ed. 1982).

In Johnson, supra, 109 Vt. at 490-91, 1 A.2d at 820, this Court held that the insurer's legal duty is that of a fiduciary. When investigating and considering a settlement offer, the insurer must in good faith take into account the interests of the insured, and will be held liable for a judgment in excess of the policy limits if it intentionally disregarded "the financial interests of [the insured] in the hope of escaping the full responsibility imposed upon it by its policy." ¹ Id. at 491, 1 A.2d at 820. Good or bad faith is a state of mind, Brown, supra, 314 F.2d at 679, provable by circumstantial as well as direct evidence. Johnson, supra, 109 Vt. at 494, 1 A.2d at 822.

The insurer is responsible for the acts of its agents, including the attorney retained by the insurer to represent the insured in the underlying action. They are held to the same standard of good faith in their dealings as their principal. Smoot v. State Farm Mutual Automobile Insurance Co., 299 F.2d 525, 530 (5th Cir.1962); Johnson v. Hardware Mutual Casualty Co., 108 Vt. 269, 286, 187 A. 788, 796 (1936).

The insurer's fiduciary duty to act in good faith when handling a claim against the insured obligates it to take the insured's interests into account. The company must diligently investigate the facts and the risks involved in the claim, and should rely only upon persons reasonably qualified to make such an assessment. If demand for settlement is made, the insurer must honestly assess its validity based on a determination of the risks involved. ² See Brown, supra, 314 F.2d at 679; Davy v. Public National Insurance Co., 181 Cal.App.2d 387, 395-96, 5 Cal.Rptr. 488, 492 (1960); In addition, and more pertinent to this case, the insurer must fully inform the insured of the results of its assessment of the risks, including any potential excess liability, and convey any demands for settlement which have been made. "[T]he insurer 'must be careful to give its insured full and accurate information as to settlement possibilities,' " Kooyman v. Farm Bureau Mutual Insurance Co., 315 N.W.2d 30, 36 (Iowa 1982) (quoting 7C J. Appleman, Insurance Law & Practice § 4712, at 487 (1979)), for full disclosure allows the insured to assess whether he should move to protect his interests. Davy, supra, 181 Cal.App.2d at 396, 5 Cal.Rptr. at 492. An insured who is kept informed may have further information to give to the carrier; he may use powers of persuasion upon the carrier to increase its offer; he may engage counsel; he may have other courses of action open to him.

Martin v. Hartford Accident & Indemnity Co., 228 Cal.App.2d 178, 184, 39 Cal.Rptr. 342, 346 (1964).

The insurer's duty to protect the insured is ongoing, and the insurer must inform the insured of significant developments as they arise. See Brochstein v. Nationwide Mutual Insurance Co., 448 F.2d 987, 990 (2d Cir.1971); Martin, supra, 228 Cal.App.2d at 185, 39 Cal.Rptr. at 347; Kooyman, supra, 315 N.W.2d at 36.

The principal issue in...