State Farm Mut. Auto. Ins. Co. v. White

• Decision Date: 13 December 1967
• Docket Number: No. 678,678
• Citation: 236 A.2d 269,248 Md. 324
• Parties: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY v. Marion E. WHITE.
• Court: Maryland Court of Appeals

Page 324

248 Md. 324

236 A.2d 269

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY v. Marion E. WHITE.

No. 678.

Court of Appeals of Maryland.

Dec. 13, 1967.

John B. Robins, Salisbury (Stanley G. Robins and Robins & Robins, Salisbury, on the brief) for appellant.

Richard M. Pollitt, Salisbury (Pollitt, Hughes & Bahen, Salisbury, on the brief) for appellee.

Before HAMMOND, C. J., and MARBURY, McWILLIAMS, FINAN and SINGLEY, JJ.

FINAN, Judge.

The question presented by this appeal, one which this Court has never been required to decide, involves the duty an insurer owes to its insured when there is an opportunity to settle the claim within the limits of the insured's liability policy. Appellant-insurer refused several offers to settle within the policy limits, and as a result, after prolonged litigation terminating in an appeal to this Court, a judgment was rendered against appellee-insured for a figure well in excess of the policy coverage. Appellee White brought suit against his insurer alleging both negligence and bad faith in refusing to settle. A jury returned a verdict in favor of White and judgment was entered for the full amount of the excess over the policy limits. From the denial of defendant's motions for directed verdict and for judgment n. o. v. or new trial, this appeal was taken.

In November of 1961, appellee White was involved in an automobile collision with one Savage. Paul Mills was a passenger in the White vehicle. At the time of the mishap, White was insured by appellant against liability to the extent of $10,000 to any one person injured as a result of White's negligence.

Mills brought suit against both drivers in June of 1963, claiming damages of $30,000, well in excess of appellee White's insurance coverage. However, White declined to retain an attorney of his own choice to represent his personal liability exposure and relied entirely on the insurer's counsel. After reviewing the facts and after interviewing appellee and Mills, the plaintiff in the lawsuit, the insurer's counsel, by a letter dated November 25, 1963, communicated his conclusions to the insurer, portions of which stated:

'There is no authority which we can find anywhere, either to support or to refute the proposition of the Plaintiff. We are confident, however, that when the question is presented the Court will rule that a stop sign does not require a vehicle to stop at that sign, especially where there is a stop line, but only at that point, where it will avoid conflict with favored traffic, and while its driver still has the opportunity to see whether it may enter the through highway safely.

'On the material which we presently have before us, therefore, we would be extremely hopeful of a directed verdict on the issue of White's negligence, although it may be necessary to take the case to the Court of Appeals to obtain it. Certainly there is a very strong hope of a favorable jury verdict on the issue of White's negligence.

'We are of the opinion, however, that, at worst, Savage's operation of his motor vehicle raises a question of fact for the jury in this case, and we believe that the jury will undoubtedly find that his conduct was a proximate cause of the accident, regardless of how they may feel about the driving of White.'

Starting in January of 1964, a series of settlement offers were made by the attorney for Mills to the State Farm adjuster. His first offer was $15,000 in full settlement of the claim, and to this offer the adjuster agreed on behalf of State Farm to contribute 50% if Savage's insurer would contribute the balance. However, Savage's insurer refused to contribute more than $5,000. On January 21, 1964, two days before trial, Mills' attorney reduced the demand to $12,500. State Farm again agreed to contribute one-half ($6,250) if Savage's insurer would do likewise, but the latter adhered to its original settlement figure of $5,000. Finally, on the day of the trial, as proceedings were about to begin, Mills' attorney delivered to the insurer's counsel a written offer to give a joint-tortfeasor's release in favor of White if State Farm would pay $10,000, the policy limit. Insurer's counsel left the courtroom, and called the adjuster to inform him of the new offer. The adjuster replied that the insurer would buy a release for no more than $6,250, one-half of the $12,500 offer previously made.

The trial resulted in a verdict in the amount of $17,495 against both defendants; however the Court of Appeals reversed the judgment against defendant Savage and affirmed as to defendant White. See Savage v. Mills, Admr'x, 237 Md. 204, 205 A.2d 239 (1964). White then instituted this action against his insurer.

It should be noted that at all times during the course of the original litigation, White steadfastly maintained his innocence based upon his experience as a former Maryland state trooper. Insurer's attorney was of the opinion that the plaintiff's case might, at the most, be worth $20,000. Even if a verdict were rendered against both defendants for that full amount, White would only be liable for one-half or $10,000, still within the limits of his policy. However, the insurer's counsel knew that White did not stop at a stop sign, and conveyed this information to the insurer, adding that it was difficult to put a firm evaluation on the case, and that it might have to go to the Court of Appeals in order to obtain a directed verdict in favor of White. It should also be remembered that under any of the offers of settlement made by Mills' attorney State Farm could have obtained a release for White by paying an amount within the limits of the policy. Finally, it should be noted that neither the State Farm adjuster nor its counsel informed White about the offers of settlement.

Heretofore, in Sweeten, Adm'r v. National Mutual Insurance Co., 233 Md. 52, 194 A.2d 817 (1963), this Court was presented with a case involving suit by the insured's administrator against the insurer to recover $9,000, the amount of the judgment rendered against the insured in excess of the $10,000 policy limit. The insured brought suit on the theory that the insurer was guilty of bad faith and negligence in not settling the damage suit brought against the insured when it had an opportunity to do so, prior to the judgment being rendered against the insured in the amount of.$19,000. However, the case reached this Court on an appeal from the lower court's action in sustaining a demurrer to the insured's declaration. The lower court not having heard Sweeten on the merits, it was unnecessary for this Court to adopt a definitive theory as to when liability would result from an insurer's failure to settle within the policy limits. The case also turned on the point of whether the insured could maintain suit to recover prior to actual payment of the excess portion of the judgment.

In reversing and remanding Sweeten, Judge Henderson cast much illumination on the question of the duty owed by the insurance carrier to its insured to effect settlement within policy limits:

'The prevailing view appears to be that recovery should be rested on the theory of bad faith, because the insurer has the exclusive control, under the standard policy, of investigation, settlement and defense of any claim or suit against the insured, and there is a potential, if not actual, conflict of interest giving rise to a fiduciary duty. See Brown v. Guarantee Insurance Company, 155 Cal.App.2d 679, 319 P.2d 69 and a note on the case in 72 Harv.L.Rev. 568; Murray v. Mossman, 56 Wash.2d 909, 355 P.2d 985; Francis v. Newton, 75 Ga.App. 341, 43 S.E.2d 282; and cases collected in 40 A.L.R.2d 168. See also the notes in 16 Okla.L.Rev. 110; 24 Ohio State L.J. 393; 15 Ark.L.Rev. 401; (1958) Ins.L.J. 404; Keeton, Liability Insurance & Responsibilities for Settlement, 67 Harv.L.Rev. 1136. All authorities seem to agree that the liability is in tort, not in contract, although arising out of a contractual undertaking. But many courts hold that the obligation is not merely to exercise good faith but to use due care. Professor Keeton seems to think that there is no practical difference in the results, since on either theory the question is one for the jury. Many courts allow recovery on both theories, and some courts that restrict recovery to bad faith permit evidence of negligence in the proof. In view of the appellee's concession, we see no reason to choose between the two theories in the case at bar.' 233 Md. at 55, 194 A.2d at 818.

Some two years after Sweeten, the Maryland Federal District Court in Gaskill v. Preferred Risk Mutual Insurance Company, 251 F.Supp. 66 (D.Md.1966) had a similar case tried before it on the merits. Chief Judge Thomsen, in a review of the law on the matter, said:

'It seems clear that the duty includes elements both of good faith and of reasonable care. This Court concludes that the proper test of liability in such a case as this (and the test which this Court believes the Maryland Court will probably apply when required to decide the question) is the good faith test, with the amplifications and limitations suggested by the quotations from the New Jersey Court (Radio Taxi Service, Inc. v. Lincoln Mutual Insurance Co., 31 N.J. 299, 157 A.2d 319 (1960)), the Fourth Circuit (American Casualty Company of Reading, Pa. v. Howard, 187 F.2d 322 (4th Cir. 1951)) and Judge Watkins (Lee v. Nationwide Mutual Insurance Co., 184 F.Supp. 634, 368 (D.Md.1960)), set out above.' 251 F.Supp. at 68.

The New Jersey case referred to by Judge Thomsen amplifies the good faith test by stating:

'Those gifted with expertise in the field of judging issues of liability and extent of injury actually suffered by a plaintiff, would probably be the first to admit that an informed judgment arrived at in good faith after reasonably diligent investigation represents the limit that should be demanded of human capacity.' 157 A.2d at 327.

The Fourth Circuit case referred to, American...