Olson v. Union Fire Ins. Co.

• Decision Date: 30 November 1962
• Docket Number: No. 35195,35195
• Citation: Olson v. Union Fire Ins. Co., 174 Neb. 375, 118 N.W.2d 318 (Neb. 1962)
• Parties: Merlin OLSON, individually and as assignee, Appellee, v. UNION FIRE INSURANCE COMPANY, a/k/a Union Insurance Company, (Mutual) a corporation, Appellant.
• Court: Nebraska Supreme Court

Page 318

118 N.W.2d 318

174 Neb. 375

Merlin OLSON, individually and as assignee, Appellee, v. UNION FIRE INSURANCE COMPANY, a/k/a Union Insurance Company, (Mutual) a corporation, Appellant.

No. 35195.

Supreme Court of Nebraska.

Nov. 30, 1962.

Syllabus by the Court

1. The liability of an insurer to pay in excess of the limits of the insurance policy accrues when the insurer, having the exclusive control of settlement, in bad faith refuses to compromise a claim for an amount within policy limits.

2. When an insurer has the exclusive right to settle a claim within the limits of its liability, it has an option to compromise but no contractual obligation to do so.

3. The amount of liability fixed by an insurance policy and upon which the premium is paid determines the limit of the contractual liability and duty of the insurer.

4. An insurer may settle a claim within the limit of its liability as it chooses since the insured cannot be prejudiced by a settlement to be paid by the insurer.

5. An insurance company is not required to waive its defense of nonliability which is made in good faith to avoid being held for a judgment in excess of the limits of its insurance policy.

6. An insurance company cannot be held for the payment of a liability in excess of policy limits merely because its determination, arrived at in good faith, proved to be erroneous in the light of subsequent events.

7. The right of an insurer to control the litigation in all of its aspects carries with it the duty to exercise diligence, intelligence, good faith, and conscientious fidelity in the interests of the parties.

8. Where an insurer has exercised good faith in declining a settlement which has been fully and fairly considered, based on an honest belief that insurer could defeat the action or keep any possible judgment within policy limits, and its conclusions are based on a fair review of the evidence after reasonable diligence in ascertaining the facts, accompanied by legal advice with reference thereto, no liability over policy limits exists even if it is ultimately determined that its determination was a mistaken one.

Healey & Healey, Chambers, Holland, Dudgeon & Hastings, Lincoln, for appellant.

Harry N. Larson, Wakefield, Wear, Boland, Mullin & Walsh, A. Lee Bloomingdale, Omaha, for appellee.

Heard before SIMMONS, C. J., and CARTER, MESSMORE, YEAGER, SPENCER, BOSLAUGH, and BROWER, JJ.

CARTER, Justice.

This is an action by plaintiff, individually and as assignee of Thomas Shellington, against the defendant insurance company because of the refusal of the latter to settle the claims of plaintiff against Thomas Shellington within the limits of an automobile insurance policy issued by the insurance company to E. C. Shellington, Thomas Shellington being an additional insured under the provisions of the insurance policy.

The automobile accident giving rise to the present litigation occurred on June 29, 1952. At about 11:30 p. m. of that day Thomas Shellington, then 17 years of age, was driving his father's automobile from Wayne to Wakefield, in Wayne County, Nebraska, accompanied by four other members of the Wakefield Junior American Legion baseball team. Merlin Olson was one of the four guests riding in the Shellington automobile. At a point 2 miles south and 2 miles west of Wakefield an accident occurred on a bridge which had been constructed on an angle with the highway. There was a curve in the highway immediately west of the bridge. The road was level for 50 rods west of the bridge. The bridge was difficult to see until one approached close to it. The railings on the bridge were unpainted, badly rusted, and dark in color. There was nothing to warn an approaching traveler from the west of the position of the bridge with reference to the road. It was a dark night. The automobile approached the bridge at a speed of 45 to 50 miles an hour on the right side of the road with its headlights on the bright beam. The driver did not see the bridge until he was about 25 feet from it. The automobile struck the bridge railing and went off the bridge. Merlin Olson sustained injuries resulting in total and permanent disability. A more detailed statement of the facts can be found in Olson v. Shellington, 167 Neb. 564, 94 N.W.2d 20.

Merlin Olson, by his mother and next friend, brought suit against the County of Wayne to recover damages for his injuries as a result of the alleged insufficiency and disrepair of the highway and bridge at the place of the accident. The trial court directed a verdict for the defendant at the conclusion of the evidence, and this court affirmed. Olson v. County of Wayne, 157 Neb. 213, 59 N.W.2d 400. Plaintiff then commenced an action against Thomas Shellington to recover for injuries sustained while riding as a guest in the automobile driven by Shellington. Whether or not Shellington was guilty of gross negligence was the primary issue in that case. The jury found for the plaintiff in the amount of $24,000 and added these words in its verdict: 'We find slight negligence on the part of the defendant.' The trial court set aside the inconsistent verdict and ordered a new trial. This court affirmed. Olson v. Shellington, 162 Neb. 325, 75 N.W.2d 709.

Upon a second trial of the case in the district court the jury found the driver of the automobile guilty of gross negligence and returned a verdict for the plaintiff for $50,000. This court on appeal held that the evidence was sufficient to take the case to the jury on the issue of gross negligence and affirmed the judgment. Olson v. Shellington, 167 Neb. 564, 94 N.W.2d 20. The insurance company thereupon paid $10,000 with interest and costs, such amount being its limit of liability under the provisions of the insurance policy.

The plaintiff thereafter commenced this action against the insurance company, alleging the issuance of the insurance policy to E. C. Shellington, that Thomas Shellington was an additional insured, the limit of liability as to any one person of $10,000, the offers to settle plaintiff's claims for $10,000, and the demands of Thomas Shellington that the offers of settlement be accepted; asserting negligence and bad faith by the insurance company in refusing to settle the claims for $10,000; and praying for judgment for $50,000. The insurance company denied liability and specifically denied that it was guilty of any negligence, or that it acted in bad faith in any manner in its handling of the litigation. For reply the plaintiff specifically denied that defendant was no longer obligated to pay any further amount by virtue of the issuance of the policy of insurance and otherwise generally denied the affirmative allegations of the answer. Upon the trial of the case the jury returned a verdict for plaintiff against the insurance company for $40,000. The insurance company has appealed. The insurance company assigns as error the failure of the trial court to sustain its motions for a directed verdict.

The liability of an insurer to pay in excess of the face of the policy accrues when the insurer, having exclusive control of settlement, in bad faith refuses to compromise a claim for an amount within the policy limit. The weight of authority is to the effect that when the insurer has the exclusive right to settle a claim within the limits of its liability, it has an option to compromise but no obligation to do so. In the event the insurer elects to resist a claim of liability, or to effect a settlement thereof of such terms as it can get, there arises an implied agreement that it will exercise due care and good faith where the rights of an insured are concerned.

The amount of liability fixed by the insurance policy, upon which the premium is paid, determines the limit of the contractual liability and duty of the insurer. An insurer may settle a claim within its limit of liability as it chooses since the insured cannot be injured by a settlement to be wholly paid by the insurer. The exclusive power to settle a claim within the limits of its liability is therefore ceded to the insurer for its sole benefit. While an insured may compromise his possible liability over and above the limits of the insurance policy, he has no duty even to attempt to do so. He may rely upon the policy, the promise to indemnify in a fixed amount, and the duty of the insurer to defend and to use its discretionary authority to settle in good faith. It is clear that the insurance company is not liable to plaintiff for refusal to settle his claim unless the refusal was in bad faith. The question raised by this appeal is whether or not the evidence is sufficient to present a question for the jury as to the bad faith of the insurance company.

'Good or bad faith is a state of mind. Of necessity, it must be determined from proof of conduct, except as the owner of the mind discloses its operations. Defendants, being corporations, could act only through agents, whose state of mind is that of the defendants.' City of Wakefield v. Globe Indemnity Co., 246 Mich. 645, 225 N.W. 643.

With these fundamental rules in mind we shall set forth the evidence upon which the verdict was returned. The testimony of plaintiff is to the effect that the serious injury sustained by Merlin Olson and the course of the litigation between plaintiff, the County of Wayne, and Thomas Shellington indicated that a judgment in excess of the limits of the insurance policy would be obtained and that it was negligence or bad faith on the part of the insurance company to refuse to settle the claim within the limits of the policy upon demand by Thomas Shellington that it do so. The evidence of the insurance company is that it honestly believed that gross negligence on the part of Thomas Shellington, the driver of the automobile involved in the accident, could not be established; in other words, that it was a nonliability claim. The evidence shows that the insurance company took statements from all persons...