Smith v. Blackwell, 63280

• Decision Date: 17 November 1989
• Docket Number: No. 63280,63280
• Citation: 14 Kan.App.2d 158,791 P.2d 1343
• Parties: Charlene SMITH, Plaintiff/Appellant, v. Sherrie BLACKWELL, Defendant, and Farmers Insurance Company, Garnishee/Appellee.
• Court: Kansas Court of Appeals

Page 1343

791 P.2d 1343

14 Kan.App.2d 158

Charlene SMITH, Plaintiff/Appellant, v. Sherrie BLACKWELL, Defendant and Farmers Insurance Company, Garnishee/Appellee.

No. 63280.

Court of Appeals of Kansas.

Nov. 17, 1989.

Review Denied Jan. 26, 1990.

Motion for Publication Granted Jan. 30, 1990.

Syllabus by the Court

1. An insurer is liable for the full amount of an insured's loss, irrespective of policy limits, if it was negligent or acted in bad faith in conducting the defense for the insured.

2. The insurer is obligated to initiate settlement negotiations regardless of the actions of the injured party.

3. In settling and defending actions against an insured, an insurer must act in the best interests of its insured.

4. An insurer cannot cure its previous negligent conduct and bad faith by offering policy limits shortly after commencement of suit.

5. The right to claim attorney fees, although initially belonging to the insured, becomes the injured party's right through garnishment proceedings.

6. Whether an insurer's refusal to pay an insured's loss is without just cause or excuse and requires allowance of attorney fees is determined by the facts and circumstances in each case.

7. For the purposes of K.S.A. 40-256, in determining whether an insurer properly refused to settle a claim, the court must view the facts and circumstances and test the insurer's deficiencies as if the insured were challenging the insurer's handling of the injured party's claim and seeking recovery for attorney fees uncurred in doing so.

8. Just cause or excuse for an insurer's refusal to settle a claim is to be judged as it appears to a reasonably prudent person having a duty to investigate in good faith and determine the true facts of the controversy.

9. A finding that the insurer is liable for an excess judgment does not automatically mandate the conclusion that the insurer acted without just cause or excuse so as to require the insurer to pay an injured party's attorney fees for prosecuting a garnishment action against the insurer.

10. Under the facts of this case, where an insurer fails (1) to make a sufficient investigation of obtain necessary medical information to properly evaluate a claim; (2) to notify the insured of an offer to settle within policy limits or give consideration to the insured's financial risks; (3) to negotiate reasonably, go forward with settlement action, or make effective attempts to settle; and (4) to recognize that its omissions and commissions make defense of a bad faith and negligence action for recovery of an excess verdict untenable, it is held the insurer 'refused without just cause or excuse to pay the full amount of such loss,' and attorney fees under K.S.A. 40-256 are allowed.

11. Where an appellate court determines that an insurer has refused without just cause or excuse to pay full amount of a loss, the court is mandated by K.S.A. 40-256 to allow attorney fees to the injured party incurred on appeal.

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John E. Shamberg, Lynn R. Johnson, and G. Gordon Atcheson, of Shamberg, Johnson, Bergman & Morris, Chartered, Overland Park, for plaintiff/appellant.

Douglas M. Greenwald and Frank D. Menghini, of McAnany, Van Cleave & Phillips, P.A., Kansas City, for garnishee/appellee.

Before LARSON, P.J., and RULON and LEWIS, JJ.

MEMORANDUM OPINION

LARSON, Presiding Judge.

Charlene Smith appeals the district court's denial of her motion for attorney fees pursuant to K.S.A. 40-256.

This garnishment action arises out of an automobile accident on November 30, 1984, in Wyandotte County. Farmers Insurance Company's insured, Sherrie Blackwell, crossed the center line and struck a car driven by Charlene Smith, causing her serious and disabling personal injuries. Smith's mother, a passenger in her car, was killed, and Blackwell was critically injured by the severe impact.

Smith sustained fractures of three ribs, multiple contusions to her face, body, and both knees, broken teeth, a nasal septal deviation, and a closed head injury resulting in damage to the olfactory nerve with impairment of her senses of smell and taste. She was hospitalized for a week and incurred medical expenses of $3,614.39. She incurred lost wages from the date of the injury until May 31, 1985, in the sum of $4,541.76. An ear, nose, and throat specialist, Dr. Luke Dlabal, opined the nasal septal deviation could be corrected at a surgical and hospital expense of approximate $2,500. The impairment of the senses of smell and taste was deemed permanent.

Vernon James, a claims adjuster for Farmers, characterized the accident as "a case of serious injuries and clear liability."

On August 10, 1985, Smith's attorney wrote Farmers offering to settle Smith's injuries for the payment of Blackwell's policy limits of $25,000. Smith's attorney stated he valued her claim to be worth $50,000.

James had never adjusted a claim involving an allegation of loss of senses of taste and smell and requested additional medical information, which Smith's counsel furnished. James did not request an independent medical evaluation.

James estimated in his claims status report of December 10, 1985, that the settlement value of Smith's claim was $20,000. He wrote that, although her attorney would not take less than the policy limits, he did not think the case was worth that much. He did state that if it cost $5,000 to try the case, Smith's claim could be worth the $25,000 policy limits.

James did not advise Blackwell of the offer to settle for the policy limits or advise her of any of the settlement discussions or negotiations.

Smith's attorney again wrote James on December 13, 1985, advising that if the case was not settled by December 23, 1985, or significant progress made toward settlement, the offer would be withdrawn and suit would be filed for recovery of Smith's damages.

On January 6, 1986, although Farmers had given him authority to settle the case for $20,000, James verbally offered $12,500 to settle Smith's claim and confirmed this offer by a letter.

Smith's lawyer, on January 13, 1986, wrote James withdrawing the offer to settle for the policy limits and stated Smith would proceed with suit and expected the insured and/or insured's carrier to pay any judgment in excess of the policy limits. James made no further attempt to settle the claim.

After Smith sued Blackwell on February 24, 1986, Farmers retained outside counsel who advised the probable verdict range at trial was $22,500 to $30,000. Based upon this recommendation in March of 1986, Farmers offered to settle for the policy limits, which was rejected by Smith's counsel.

The case proceeded to trial and the jury rendered a verdict in favor of Smith in the amount of $50,000. Farmers did not appeal and paid its $25,000 policy limits into court.

On May 6, 1987, Smith served a garnishment order on Farmers, seeking to collect the amount of judgment in excess of the policy limits. Farmers answered, denying liability for the claims against Blackwell. After a hearing and introduction of evidence, the trial court found Farmers had failed to exercise good faith and was negligent in failing to settle the claims against Blackwell within the policy limits. In this finding the trial court based its holding on: (1) the strength of the claimant's case based on the issues of liability and damage; (2) failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured; (3) failure of the insurer to inform the insured of a compromise offer to settle within the policy limits; (4) the amount of financial risks to which each party was exposed in the event of a refusal to settle; (5) a settlement offer of $12,500 at the time authority to settle for $20,000 existed and the likelihood of recovery in excess of the policy limits; (6) failure to obtain an independent medical evaluation and evidence of damages payable for the loss of the senses of smell and taste; (7) failure to exercise a continuing duty to attempt settlement within policy limits prior to suit being filed.

Judgment was rendered against Farmers for an additional $25,000, which Farmers paid without appealing.

Smith then moved for attorney fees pursuant to K.S.A. 40-256 as a result of the garnishment proceedings. The trial court heard arguments and denied the motion, finding the case had presented several novel issues providing "just cause or excuse for Farmers' refusal to pay the excess judgment." Smith appeals. We reverse.

Although the trial court characterized three issues as novel and of first impression, we believe there are well-established and longstanding precedents which properly justified the earlier finding of bad faith and negligence on Farmers' behalf.

The three issues discussed by the trial court in denying the request for attorney fees were:

(1) Whether an insurer can be held liable for an excess judgment for failure to offer policy limits prior to commencement of litigation;

(2) whether an insurer can "cure" its negligent failure to offer its policy limits by offering such limits shortly after commencement of suit; and

(3) whether the measure of damages should be payment of the excess judgment or reasonable attorney fees to the time of the offer of the policy limits.

As early as 1920, the Kansas Supreme Court held that an insurer was liable for the full amount of the insured's loss, irrespective of policy limits, if it was negligent in conducting the defense for the insured. Anderson v. Surety Co., 107 Kan. 375, 191 P. 583 (1920). In Bennett v. Conrady, 180 Kan. 485, 489-91, 305 P.2d 823 (1957), for the first time, bad faith as well as negligence was involved. Bennett held an insurer is liable for the full amount of its insured's resulting loss, even if that amount exceeded the limits of the policy, for negligence or bad faith in defending or settling an action against the insured.

By the time the landmark case of Bollinger v. Nuss, 202 Kan. 326, 449...