Smiley v. Manchester Ins. & Indem. Co. of St. Louis

• Decision Date: 03 April 1978
• Docket Number: No. 49812,49812
• Citation: 16 Ill.Dec. 487,375 N.E.2d 118,71 Ill.2d 306
• Parties: , 16 Ill.Dec. 487 Roy J. SMILEY et al. v. MANCHESTER INSURANCE & INDEMNITY COMPANY OF ST. LOUIS. MANCHESTER INSURANCE & INDEMNITY COMPANY OF ST. LOUIS, Appellee, v. William D. KNIGHT, Jr., Appellant.
• Court: Illinois Supreme Court

Page 118

375 N.E.2d 118

71 Ill.2d 306, 16 Ill.Dec. 487

Roy J. SMILEY et al. v. MANCHESTER INSURANCE & INDEMNITY COMPANY OF ST. LOUIS.

MANCHESTER INSURANCE & INDEMNITY COMPANY OF ST. LOUIS, Appellee, v. William D. KNIGHT, Jr., Appellant.

No. 49812.

Supreme Court of Illinois.

April 3, 1978.

Reno, Zahm, Folgate, Skolrood, Lindberg & Powell, Rockford (Robert K. Skolrood, Robert A. Fredrickson, and Mark W. Boswell, Rockford, of counsel), for appellant.

Barrick, Jackson, Switzer, Long & Balsley, Rockford (Peter S. Switzer, Rockford, of counsel), for appellee.

RYAN, Justice:

In this third-party proceeding in the circuit court of Winnebago County, Manchester Insurance & Indemnity Company of St. Louis (hereinafter referred to as Manchester) sued attorney William D. Knight, Jr., for malpractice, alleging that his negligent acts in defense of an insured, Charles Toney, resulted in its liability for damages in excess of the policy limits. Knight counterclaimed, seeking fees allegedly due him for legal services rendered. After trial, the jury found for Knight on the malpractice issue and for Manchester on the issue of fees. Manchester appealed, alleging alternatively that the trial court had erred in failing to grant a directed verdict, a judgment notwithstanding the verdict, or a new trial. The appellate court held that the trial court erred in denying Manchester's motion for a directed verdict or judgment notwithstanding the verdict and ordered a new trial on the issue of damages alone. (49 Ill.App.3d 675, 7 Ill.Dec. 522, 364 N.E.2d 683.) We granted Knight's petition for leave to appeal.

The original lawsuit was brought against the estate of Charles Toney for damages arising from an automobile accident on February 13, 1967. The accident occurred when Toney's car crossed the center line of the road and collided with a vehicle in which Roy J. Smiley and Byron Emanuel were riding. Smiley was injured, and Emanuel was killed, as was Toney. Toney's two passengers, Lemeau and Isizia Arnold, were injured.

Attorney Bernard P. Reese was retained to represent Smiley and the administrator of Emanuel's estate. After discovering that the only asset in Toney's estate was a Manchester insurance policy with limits of $10,000 per person and $20,000 per accident, Reese attempted to settle for policy limits with William Eastman, an insurance adjuster representing Manchester. During the course of their communications, Reese told Eastman he hoped the insurance company would refuse to settle so that he could establish bad faith refusal to settle within policy limits and thus support an attempt to collect from the insurance company any verdict he would recover in excess of the policy limits. Eastman made a full report of his investigation and Reese's comments to Manchester; however, they refused to settle or make a counteroffer. On October 4, 1967, Reese brought suit against Toney's estate, seeking $100,000 for the wrongful death of Emanuel and $50,000 for Smiley's personal injury. Manchester assigned the case to attorney Knight on November 16 1967, and sent him the complete case file, including Eastman's reports of the investigation and conversations with Reese. On November 27, 1967, Knight received notice that Toney's passengers, the Arnolds, had also been injured and were represented by attorney Clifford Stoner, although no suit had been filed on their behalf.

William Blackwell, claims supervisor for Manchester, testified that he had a phone conversation with Knight on November 27, 1967, in which he suggested that Knight try to get all the claimants together and "see if some settlement couldn't be made." On December 6, 1967, Blackwell sent Knight a letter stating:

"(W)e should probably make some effort to get the claimants together, and make some disposition of all of the claims, and effect whatever savings of the policy limit possible for a final disposition, as far as we are concerned.

Please proceed with your handling, with the above in mind and keep us advised."

In December 1967 Knight took the deposition of an occurrence witness, Glenn Carpenter, which indicated that Toney, the insured, was on the wrong side of the road when the accident occurred. In January 1968 he mailed this deposition to Manchester. On June 4, 1968, the case was set for trial on June 24, 1968. At this time, he wrote Manchester for instructions. On June 18, 1968, Knight took a deposition from plaintiff Smiley. According to the deposition, Smiley had suffered a multiple fracture of his jaw, a fractured ankle requiring screw fixation, a concussion, and loss of teeth, had spent approximately $1,600 in medical expenses, and had missed work for 21/2 months, thereby losing approximately $2,000 in wages. At some time after June 4, 1968, but prior to June 18, 1968, Knight also took a deposition from Emanuel's widow. This deposition indicated that at the time of his death, Emanuel was 26 years old, in good health and married, with a 31/2-year-old son. He had graduated from high school, attended DeVry Electrical School for advanced training, and netted approximately $125 per week at his job. The expenses in connection with his death were approximately $3,200. Knight also discovered that the Arnolds had never made a demand to settle, nor had they filed suit on their claims.

At 2 p. m. on June 18, 1968, Blackwell had a telephone conversation with Knight. At that time he authorized Knight to use $20,000 to settle all claims arising from the accident; $17,000 to dispose of the Smiley and Emanuel claims and $3,000 for possible claims of the Arnolds. Knight spoke with Reese on June 18, at 4 p. m., at which time Reese renewed his demand to settle both claims for $10,000 each. Knight did not make a counteroffer.

Knight also had a conversation with Blackwell on June 21, 1968, at 4:20 p. m. regarding Manchester's instructions for handling the case. Each testified to conflicting versions of the conversation. Blackwell testified that Knight explained Reese's demands to settle both claims for the policy limits, but was unable to remember whether Knight had told him he had not offered the $17,000 settlement to Reese. Blackwell further testified that he specifically authorized Knight to settle the Smiley and Emanuel claims for the full policy limit of $20,000 in order to avoid a jury verdict against Manchester.

According to Knight's version of the conversation, he informed Blackwell that he had not offered the $17,000 and Blackwell instructed him to "try the case, go all the way." He maintained that Blackwell never gave him authority to settle the Smiley and Emanuel cases for $20,000. Knight also testified that he requested written confirmation of the conversation from Blackwell.

On June 24, 1968, prior to the jury selection, Knight and Reese met in conference with the trial judge. The following conversation took place:

"Mr. Reese: Is there any offer of settlement in this case, for the record?

Mr. Knight: I have no comment on that.

Mr. Reese: I want to know on behalf of Roy Smiley, whether the injuries and the liability is clear and we offer to settle Mr. Roy Smiley's case for $10,000.00.

Mr. Knight: I have no comment.

Mr. Reese: We do likewise, with reference to Patricia Emanuel (Emanuel's widow).

Mr. Knight: I have no comment on that."

The case proceeded to trial, and on June 25, 1968, at about 3 p. m., while the jury was deliberating, Knight received the following written memorandum from Blackwell:

"6/21/68

Dear Mr. Knight

Confirming our conversation this date, you do have auth. to offer our policy limit of 20,000 to dispose of the pending suits should the need arise.

/s/ W.C. Blackwell"

After receipt of this message, Knight did not make an offer of any type to Reese, nor did he call Blackwell. He later explained that he felt the memo was consistent with his authority to use $17,000 and hold $3,000 in reserve for the Arnolds. About two hours after Knight received this letter, the jury returned verdicts in favor of Smiley for $25,000 and in favor of Emanuel's estate for $50,000, the latter being reduced by the court to the $30,000 then-maximum statutory amount. Manchester paid the judgments to the extent of the policy limit of $20,000 plus interest. Reese then obtained an assignment, from the insured's estate to his clients, of all claims against Manchester. In November 1968 he brought an action against Manchester to recover the amount of the judgments in excess of policy limits, alleging a bad faith refusal to settle the cases within policy limits. Summary judgment was entered against Manchester for $35,000 plus interest. On appeal, the summary judgment was affirmed. (Smiley v. Manchester Ins. & Indem. Co. (1973), 13 Ill.App.3d 809, 301 N.E.2d 19.) Prior to appeal, however, the instant third-party action was commenced by Manchester, charging Knight with negligence resulting in liability in excess of the policy limits.

During the trial on this third-party complaint, Knight and Blackwell testified as to the various developments, as heretofore mentioned. Blackwell also testified as to reports of the accident investigation and early correspondence with attorney Reese as relayed to him by the adjuster, William Eastman. Knight indicated that he had never bothered to offer the $17,000 because he felt it would be a useless gesture in light of Reese's continual demand for $10,000 apiece for both claims. He also testified that he felt the memo he received on June 24, 1968, was consistent with the June 18 instruction to spend $17,000 and reserve $3,000 and the June 21 instruction to "try the case, go all the way."

Attorney Reese also testified at the malpractice trial. He stated that although he noticed nothing unusual about Knight's actions, he was puzzled by Manchester's refusal to settle. In addition, while he confirmed Knight's statement that he would not have settled for less than $10,000 each for both claims, he admitted that he might have changed his...