Romstadt v. Allstate Ins. Co.

• Decision Date: 17 July 1995
• Docket Number: No. 94-3326,94-3326
• Parties: Kenneth M. ROMSTADT, Plaintiff-Appellant, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 608

59 F.3d 608

Kenneth M. ROMSTADT, Plaintiff-Appellant, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee.

No. 94-3326.

United States Court of Appeals Sixth Circuit.

Argued March 27, 1995.

Decided July 17, 1995.

George C. Rogers, Rogers, Godbey & Horner, Toledo, OH (argued and briefed), for plaintiff-appellant.

John D. Willey, Jr., Eastman & Smith, Toledo, OH (argued and briefed), for defendant-appellee.

Before: JONES and SILER, Circuit Judges; WISEMAN, District Judge. ^*

NATHANIEL R. JONES, Circuit Judge.

Plaintiff Kenneth Romstadt is appealing summary judgment for Defendant Allstate Insurance Company ("Allstate") in this diversity action alleging bad faith denial of an insurance claim. For the reasons that follow, we hold that in order for an injured third party to bring a claim against an insurer for bad faith in failing to settle within policy limits, there must first be an adjudicated excess judgment entered against the insured. We affirm the decision of the district court.

I. Background

On December 20, 1989, Tracy Smith "rear-ended" the car Kenneth Romstadt was driving. Ms. Smith was insured by Allstate pursuant to a policy issued to her mother, Rose Chamblee. Smith's car was not damaged; Allstate paid Romstadt's $143.00 repair bill. Subsequently, Romstadt complained of back pain, and in the year after the accident he underwent two disk surgeries.

There is no dispute as to Smith's liability for the accident. The maximum on her policy with Allstate is $25,000.

In September 1990, Romstadt's counsel demanded a settlement from Allstate of $96,000 for Romstadt's lost wages and medical expenses allegedly resulting from the December accident. Allstate rejected the offer because Romstadt's medical reports showed that he had a history of chronic back pain as well as a previous, more serious accident in May 1989. Based on these reports Allstate concluded that Romstadt's injuries were not necessarily attributable to the December 1989 accident.

On October 1, 1990, Romstadt's counsel offered to settle for Allstate's policy limit of $25,000, noting that regardless of Romstadt's prior medical history, the aggravation of a pre-existing condition was recoverable. Allstate rejected this offer, but countered with a $2,000 settlement offer. It is undisputed that Allstate did not advise Ms. Smith of Romstadt's $25,000 settlement offer.

On November 27, 1990, Romstadt and his wife filed suit against Smith in Lucas County Common Pleas Court. At one point, Allstate offered its $25,000 policy limit as settlement, but Romstadt rejected this offer. Ultimately, Romstadt offered to settle by having Smith enter into an agreed judgment for $125,000 and an assignment from Smith to Romstadt of all her claims against Allstate in exchange for the Romstadts filing a release and satisfaction of the judgment against Smith. Because of the conflict presented by the demand, Allstate's counsel for Smith, Michael Bruno, advised Smith, the court, and Romstadt that he could not advise or represent Smith with regard to the settlement. The court appointed Jerome Phillips to act as independent counsel for Smith with regard to the settlement offer. On June 12, 1992, upon Phillips' advice, Smith accepted the settlement offer and assigned her claims against Allstate to the Romstadts. On June 30, 1992, the court accepted an agreed entry of judgment in the amount of $125,000, signed by Phillips and Romstadt's counsel. Allstate was not a party to the settlement.

In September 1992, Allstate paid its policy limit of $25,000 to the Romstadts. On October 27, 1992, the Romstadts released the judgment against Smith as fully satisfied. On October 29, 1992 Romstadt, as assignee of Smith, then filed this action against Allstate in the Court of Common Pleas of Lucas County, Ohio against Allstate for alleged breach of its contractual duties and its bad faith in failing to investigate, settle, and defend Ms. Smith. Romstadt sought $200,000 compensatory damages and $2,000,000 punitive damages. Allstate had the case removed to federal court on the basis of diversity jurisdiction. Allstate filed its Answer on December 22, 1992.

On May 14, 1993, Romstadt filed a motion for summary judgment on the bad faith claim. In late June, Allstate moved for summary judgment. On February 23, 1994 United States District Judge David Dowd denied Romstadt's motion and granted Allstate's motion. Romstadt v. Allstate Ins. Co., 844 F.Supp. 361 (N.D.Ohio 1994). Romstadt now appeals to this court.

II. Discussion

The district court granted summary judgment to Allstate. "We review a district court's grant of summary judgment de novo. ... [I]n a motion for summary judgment, '[c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.... The evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.' " Russo v. City of Cincinnati, 953 F.2d 1036, 1041-42 (6th Cir.1992) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986), and citing Vollrath v. Georgia-Pacific Corp., 899 F.2d 533, 534 (6th Cir.), cert. denied, 498 U.S. 940, 111 S.Ct. 345, 112 L.Ed.2d 310 (1990)). "Summary judgment is appropriate only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Kraus v. Sobel Corrugated Containers, Inc., 915 F.2d 227, 229 (6th Cir.1990).

A.

Romstadt first argues that pursuant to rules 8(c) and 12(b) of the Federal Rules of Civil Procedure, a defense based upon fraud or collusion is waived if not raised in the first responsive pleading. We find this first argument to be without merit since we hold that Romstadt's bad faith claim fails at the outset, thus precluding any need to determine whether Allstate has waived certain affirmative defenses to that claim. The defense of failure to state a claim upon which relief can be granted is protected from waiver through trial. See Fed.R.Civ.P. 12(h)(2). ¹

B.

Romstadt next argues that the district erred in determining that Smith was never exposed to an excess judgment. Romstadt argues that the agreed judgment was not only valid and binding on Allstate, but also exposed Smith to excess liability allowing Romstadt's bad faith claim to go forward. The district court ultimately found that the agreed judgment allowed Smith to "walk away with her assets insulated from any liability." 844 F.Supp. at 367. The court found that as a matter of law Smith was not exposed to excess liability and Romstadt could not maintain a bad faith claim against Allstate. We agree.

Currently, under Ohio law, the proper standard to be used to decide whether an insurer has breached its duty to its insured to act in good faith is the "reasonable justification" standard. Under this standard, " 'an insurer fails to exercise good faith in the processing of a claim of its insured where its refusal to pay the claim is not predicated upon circumstances that furnish reasonable justification therefor.' " Zoppo v. Homestead Ins. Co., 71 Ohio St.3d 552, 644 N.E.2d 397, 399-400 (1994) (quoting Staff Builders, Inc. v. Armstrong, 37 Ohio St.3d 298, 525 N.E.2d 783, 788 (1988)). ² In Hart v. Republic Mut. Ins. Co., 152 Ohio St. 185, 87 N.E.2d 347 (1949), the Ohio Supreme Court first announced this standard, explaining that in order for a tort action to lie against an insurer for failing or refusing to settle a claim brought against the insured for an amount within the policy limits, "so as to entitle the insured to recover for the excess of the judgment over the policy limit [, the insurer] must have been guilty of fraud or bad faith." 87 N.E.2d at 349 (emphasis added) (internal quotation omitted). Thus, under Ohio law, implicit in bringing an action against an insurer for bad faith with respect to settling a claim within policy limits, is a requirement that there be an excess judgment against the insured. See id.; Hoskins v. Aetna Life Ins. Co., 6 Ohio St.3d 272, 452 N.E.2d 1315, 1320 (1983) (explaining that "[i]n order to recover for the excess liability" insured must show that insurer's refusal to settle was not made in good faith); cf. Marginian v. Allstate Ins. Co., 18 Ohio St.3d 345, 481 N.E.2d 600, 603 (1985) (holding no claim of bad faith could lie where insurer settled claim within policy limits as provided by terms of insurance contract, and noting that cases recognizing bad faith claim were distinguishable in part because "the instant insured has not been exposed to further liability, over and above the limits of his policy").

Romstadt argues that the district court should have found Allstate to be bound by the agreed judgment between the Romstadts and Smith because Allstate had an obligation to provide a defense for Smith and to control settlement of the case, and Allstate did not meet these obligations. See Romstadt Br. at 8-9. Romstadt declares that

"[t]here is an either/or situation here. Either Allstate agreed to Jerome Phillips as defense counsel and therefore agreed to the settlement that he agreed to as part of the Allstate-provided defense (regardless of Mr. Phillip's [sic] reasons for advising such settlement). Or Allstate abandoned its right to control the defense, without making any objection to the defense counsels' action, by maintaining silence when it had a duty and opportunity to speak."

Id. at 8. Romstadt further argues that "[t]he very fact of the entry of judgment itself [against Smith] constitutes damage and harm sufficient to permit recovery." Id. at 9. We do not find these arguments to be convincing.

Allstate neither agreed to the consent judgment, nor abandoned its defense of Smith as its insured. We hold that Allstate was not a party to the agreement, and thus not bound to the judgment. See Xebec Dev. Partners, Ltd., v. National Union Fire Ins. Co., 12 Cal.App.4th 501, 544, 15 Cal.Rptr.2d...