Portland General Elec. Co. v. Pacific Indem. Co.

• Decision Date: 18 April 1978
• Docket Number: No. 75-1353,75-1353
• Parties: PORTLAND GENERAL ELECTRIC COMPANY, an Oregon Corporation and Ralph Rokeby-Johnson, Underwriter at Lloyds, London, Plaintiffs-Appellants, v. PACIFIC INDEMNITY COMPANY, a corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 469

574 F.2d 469

PORTLAND GENERAL ELECTRIC COMPANY, an Oregon Corporation and Ralph Rokeby-Johnson, Underwriter at Lloyds London, Plaintiffs-Appellants, v. PACIFIC INDEMNITY COMPANY, a corporation, Defendant-Appellee.

No. 75-1353.

United States Court of Appeals Ninth Circuit.

April 18, 1978.

Rehearing and Rehearing En Banc Denied June 2, 1978.

William H. Morrison (argued), of Morrison, Dunn, Cohen, Miller, & Carney, Portland, Ore., for plaintiffs-appellants.

John Gordon Gearin (argued), of Gearin, Landis & Aebi, Portland, Ore., for defendant-appellee.

Appeal from United States District Court District of Oregon.

Before GOODWIN and SNEED, Circuit Judges, and POOLE, ^* District judge.

POOLE, District Judge.

Appellants Portland General Electric Company (PGE) and its excess liability insurer, Ralph Rokeby-Johnson, an underwriter at Lloyds of London (Lloyds), brought action in Oregon state court against Pacific Indemnity Insurance Company (Pacific) charging it with bad faith refusal to settle a personal injury claim within the policy limits in connection with a lawsuit in which PGE was defendant. Pacific removed the action to Federal District Court on diversity grounds, and that court subsequently ruled in Pacific's favor. Appellants appealed from the judgment below on the grounds that the findings of fact were clearly erroneous and that the court's conclusions of law were unsupported by Oregon case authority. We reverse.

In the original personal injury case, the plaintiff, Harold Parker, a workman, sustained serious injuries when a pipe he was handling struck a high-voltage power line which had been installed by PGE. Parker, 49 years old, married, father of two young children, suffered the virtual destruction of both hands. He resisted amputation and endured twelve painful operations which nonetheless failed to restore more than minimal use of his hands. He sued PGE, McIntyre Electric Company (a contractor which had worked on the power line), and Clarence Owens, a subcontractor under McIntyre. The complaint sought $850,000 general damages and more than $61,000 in special damages. PGE was self-insured for $25,000. Pacific insured PGE for an additional $250,000 and Lloyds insured any excess liability over $275,000. PGE and Pacific were separately represented by counsel.

In pretrial discussions the defense attorneys and George Broatch, Pacific's claims manager for the northwest, concluded that although there was some slight possibility of a defense verdict based on contributory negligence, liability would be found with a probable verdict for plaintiff in the $100,000 to $200,000 range. The attorneys believed that a verdict in excess of $275,000 (the combined sum of PGE's $25,000 self-insurance and Pacific's $250,000) was unlikely. One PGE claims manager, however, felt that the case had a $300,000 settlement value and so advised Lloyds. Defense counsel also knew of a similar case, in the same county, during the previous year, involving another public utility which had resulted in a plaintiff's verdict of $600,000. Broatch, himself, who had exclusive authority to settle on behalf of Pacific, believed that a verdict for Parker, were liability to be established, would be not less than $170,000 and not over $240,000. He also believed that Parker would win.

Three weeks before the trial Parker offered to settle for $125,000. Broatch would go no higher than $105,000. Actually, Broatch was willing on Pacific's behalf to contribute only $75,000. PGE offered to contribute $5,000 on top of its basic liability of $25,000. Defense counsel urged Broatch to settle for $125,000, but he refused. The record shows no counteroffer.

The ensuing jury trial was a defense disaster. Parker was awarded a verdict of $701,834. Although defense counsel believed that the trial court had made several reversible errors, particularly in regard to contributory negligence, the case was settled before appeal for $459,000. This action was subsequently brought by PGE and Lloyds against Pacific on a claim of bad faith refusal to settle within the policy limits. After the federal court trial, a judgment was entered for Pacific. The District Court expressly found that there was no reasonable prospect of excess exposure beyond $250,000 and therefore concluded that Pacific had acted in good faith. Appellants challenge the District Court's findings of fact as well as its conclusions of law, and, particularly the finding of good faith. Rule 52(a), Federal Rules of Civil Procedure, provides that a judge's findings of fact will stand unless clearly erroneous.

" * * * A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948); Collman v. C. I. R., 511 F.2d 1263, 1267 (9th Cir. 1975).

A trial court's rulings on questions of law, however, have less deferential protection on review. 9 Wright & Miller, Federal Practice and Procedure, § 2588, at 750 n. 44 (1971). An Appellate Court should give great weight to the determinations of state law made by a district judge experienced in the law of that state, but the parties are entitled to a review of the trial court's determinations of state law just as they are as to any other legal question in the case. Freeman v. Continental Gin Co., 381 F.2d 459, 466 (5th Cir. 1967).

The sole issue on appeal is whether the district court's finding that Pacific acted reasonably and in good faith was clearly erroneous. ¹ For the reasons herein set forth we find ourselves left with the definite and firm conviction that a mistake was committed in the finding of reasonableness and good faith. We are further of the opinion that in the application to these facts of the substantive law of Oregon, which controls this diversity case, the trial court was in error.

In Radcliffe v. Franklin National Ins. Co. of New York, 208 Or. 1, 298 P.2d 1002 (1956), the Hodges, husband and wife, sued the plaintiff insured for damages for personal injuries. The wife sought $50,000 and the husband $10,000. The policy limits were $10,000 for a single insured and $20,000 for multiple insureds. On the second day of trial, the Hodges' attorney offered to settle for $10,000 in satisfaction of all claims. The defense attorney believed the case had a settlement value of between $7,500 and $8,000. The insurer made no response to this offer. The jury verdict was $21,500 of which the insurer paid $11,500, leaving the Radcliffe's to pay $10,000 for the recovery of which they sued the insurer. The trial court directed a verdict for the defendant insurer. The Supreme Court of Oregon reversed, holding that there was sufficient evidence to make a jury issue as to whether the company had shown bad faith in failing to discover certain evidence which might have revised its estimate of the value of the case and the probability of a verdict for the claimants.

Justice Rossman, who authored Radcliffe, made an exhaustive survey of the duty of a liability insurer in negotiating for settlement. After analyzing the various standards applied in other jurisdictions where an insurer rejects settlement offers, he concluded the law of Oregon to be that, "the minimum which is expected of an insurer is that it employ good faith when it disposes of settlement matters." Id. at 38, 298 P.2d at 1019. The opinion approved the holdings in Hall v. Preferred Accident Ins. Co., 204 F.2d 844, 848 (5th Cir. 1953), that " * * * a defense going far enough to show reasonable and probable cause for making it will vindicate the good faith of the insurance company." It also approved the statement found in Traders and General Ins. Co. v. Rudco Oil & Gas Co., 129 F.2d 621, 627 (10th Cir. 1942), that:

" * * * the right to control the litigation in all of its aspects carries with it the correlative duty to exercise diligence, intelligence, good faith, honest and conscientious fidelity to the common interest of the parties."

It quoted the decision in Tyger River Pine Co. v. Maryland Casualty Co., 170 S.C. 286, 292, 170 S.E. 346, 348 (1933) that the thing which an insurer undertakes to do is to hold the insured harmless in disposition of the claim and that:

"If, in the effort to do this, its own interests conflicted with those of (the insured), it was bound, under its contract of indemnity, and in good faith, to sacrifice its interests in favor of those of the (insured). * * * "

The Court also quoted the following from Dumas v. Hartford Accident & Indemnity Co., 94 N.H. 484, 56 A.2d 57, 60 (1947):

" * * * in other words, in deciding whether or not to settle the insurer must be as quick to compromise and dispose of the claim as if it itself were liable for an excess verdict. (Citations omitted). Moreover it follows from the standard of due care that the insurer cannot be too venturesome and speculate with a trial of the issues in the accident case at the risk of the insured."

In Radcliffe, the court referred to Professor Robert E. Keeton's article, "Liability Insurance and Responsibility for Settlement," 67 Harv.L.Rev. 1136 (1954):

" * * * the controlling rule should balance the risks involved and thereby cause the insurer in settlement matters to behave as if it were liable for the entire judgment that may eventually be entered. There is manifest merit in the suggestion. Keeton's recommendation has found acceptance in decisions such as Dumas v. Hartford Accident & Indemnity Co., supra, which require the insurer to be as 'quick to compromise and dispose of the claim as if it itself were liable for any excess verdict.'

"Plainly, an automobile owner who procures a policy of limited liability insurance understands that the company is in business and that unless it looks after its own interests it cannot expect to survive. The insurer, obviously, has...