Peter v. Travelers Insurance Company

• Decision Date: 25 April 1974
• Docket Number: Civ. No. 72-960-RJK.
• Citation: 375 F. Supp. 1347
• Court: U.S. District Court — Central District of California
• Parties: Geoffrey Raymond PETER and Norman Valentine, Plaintiffs, v. The TRAVELERS INSURANCE COMPANY, a corporation, Defendant.

375 F. Supp. 1347

Geoffrey Raymond PETER and Norman Valentine, Plaintiffs, v. The TRAVELERS INSURANCE COMPANY, a corporation, Defendant.

Civ. No. 72-960-RJK.

United States District Court, C. D. California.

April 25, 1974.

Richard F. Outcault, Jr., Lawler, Felix & Hall, Los Angeles, Cal., Harlow P Rothert, Cullinan, Hancock, Rothert & Burns, San Francisco, Cal., for plaintiffs.

Francis Breidenbach, Cummins, White & Breidenbach, Los Angeles, Cal., for defendant.

MEMORANDUM OF DECISION

KELLEHER, District Judge.

Plaintiff Valentine is one of several underwriters at Lloyd's of London who wrote a blanket liability insurance policy issued to Loffland Brothers Drilling Company (hereinafter Loffland) covering its legal liability in excess of $250,000. The other underwriters of this policy have agreed to Valentine's representing their interests in this matter. Defendant Travelers Insurance Company was the primary liability insurer of Loffland, with policy limits of $250,000. Eldor D. Horning, an employee of Loffland, was injured while working at a drilling site in an oil field in Alaska operated by American Petroleum Corporation and American Richfield Corporation (hereinafter ARCO). Horning brought suit in the Central District of California against American Petroleum and ARCO. Travelers defended this suit with an agreement to indemnify American Petroleum and ARCO for any recovery by Horning subject to the terms and limitations of its policy. At trial the jury returned judgment in favor of Horning in the amount of $407,000. After judgment the plaintiff agreed to accept, in compromise settlement, the sum of $137,984.10 in excess of the primary limit of $250,000.

Plaintiff's first cause of action is to recover the excess amount paid to Horning as a result of the above judgment and pursuant to the terms of the policy of excess insurance. Plaintiff contends that it was the breach of defendant's duty to negotiate a settlement within its policy limits that necessitated plaintiff's payment of the excess under its policy. In a second cause of action, plaintiff claims that defendant should have but did not attempt to impose a lien on workman's compensation benefits paid to Horning by Travelers. Plaintiff alleges that such a lien would have reduced the judgment and thus the amount of plaintiff's liability to Horning.

During the pendency of the Horning case, Travelers changed its settlement policy. The home office in Hartford, Connecticut, withdrew authority for its branch offices to make settlement offers in excess of $15,000 without first obtaining authorization from the Hartford office. In addition, there was considerable lack of communication between the Hartford office and the Los Angeles office that was processing the claim. The defendant's agent in Los Angeles had written some letters to the home office indicating some chance of avoiding all liability, but also he suggested the value of the claim to be around $100,000. The Hartford office, without seeking further advice from the local attorneys, refused to authorize any offer to settle greater than $15,000. As a result of this confusion within the Travelers' organization, Horning's tendered offers to settle within the policy limits of $250,000 were refused. Meaningful settlement negotiations were never conducted between the parties because of the defendant's refusal to give meaningful consideration to settlement. The breach of duty by the defendant consists of this failure to give any adequate consideration to the settlement prospect.

Standards for determining whether an insurer would be liable in excess of its policy limits for failure to accept a settlement offer within those limits were considered in Crisci v. Security Insurance Co. of New Haven, Conn., 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173 (1967). It was there reasoned that in every contract, there is an implied covenant of good faith and fair dealing that neither party will do anything which will injure the right of the other to receive the benefits of the agreement and, further, that this implied obligation requires an insurer to settle in an appropriate case, although the express terms of a particular policy do not impose this duty. When determining whether to settle a case, the interest of the insured must be given at least as much consideration as those of the insurer. In making this determination, the test is whether a prudent insurer without policy limits would have accepted the settlement offer. The Court need not find that the available offer should have been accepted. The finding is that no offer in excess of $15,000 was to be considered. This was arbitrary, capricious and unreasonable in the circumstances.

Crisci also makes it clear that the reasonableness standard is to be used in judging the insurer's decision to refuse a settlement offer. Liability is imposed not for a bad faith breach of the contract, but for a failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing. The failure even to consider the question of what settlement would be reasonable is a breach of greater proportion than the refusal of a reasonable offer.

In the case before us, the injuries to Horning were serious. Although Travelers was hopeful that it could avoid liability completely, it should also have realized that a substantial recovery was possible. One of Travelers' own claims supervisors in Los Angeles had determined the value of the case to be $100,000. Because of the unfortunate breakdown in communication during the initiation...