United States Fidelity and Guaranty Company v. Lembke

• Decision Date: 03 March 1964
• Docket Number: No. 7393.,7393.
• Citation: 328 F.2d 569
• Parties: UNITED STATES FIDELITY AND GUARANTY COMPANY, a Maryland corporation, Appellant, v. Henry H. LEMBKE, Jr., Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

328 F.2d 569 (1964)

UNITED STATES FIDELITY AND GUARANTY COMPANY, a Maryland corporation, Appellant, v. Henry H. LEMBKE, Jr., Appellee.

No. 7393.

United States Court of Appeals Tenth Circuit.

March 3, 1964.

Harold B. Wagner, Denver, Colo. (Raymond A. Wagner and Carl A. Wyers, Denver, Colo., were with him on the brief), for appellant.

Jackson M. Seawell, Denver, Colo., for appellee.

Before PICKETT, LEWIS, and SETH, Circuit Judges.

SETH, Circuit Judge.

The insured, Henry H. Lembke, Jr., brought an action in the United States District Court for the District of Colorado against the United States Fidelity and Guaranty Company, the insurer, by a complaint alleging that the appellant was negligent in its investigation of a claim brought by Irving J. Hayutin against appellee, and further that the appellant acted in bad faith in not making a settlement of this claim for less than the policy limits when it had an opportunity to do so. A jury trial was had and judgment was entered for appellee in the amount of $24,000, from which appellant appeals.

The appellant had issued what it described as a comprehensive general liability policy to the appellee, the property damage liability portion of which had a limit of $5,000. Lembke was engaged in the plumbing and heating business, and had installed the plumbing for the residence of Irving J. Hayutin and his wife. The Hayutins claimed that their residence was damaged by water leaking under it from fixtures installed or damaged by appellee. On the basis of this claim, they brought action against appellee in the District Court of Arapahoe County, Colorado, and recovered a judgment in the amount of $26,000. It was this claim or suit which the appellee in his complaint herein alleged should in good faith have been settled within the policy limits, and complained that the appellant was negligent in its investigation thereof.

The sequence of events insofar as they indicate the investigation and negotiation of the claim of the Hayutins may be described as follows: The claim under the policy was filed by the insured in April 1955, and a letter in September 1955 from the claimant to the appellant-insurer set out in some detail his analysis of the cause of damage to the house and the events leading up to it. In May 1956 an engineer was employed by appellant-insurer and he inspected the house. In July 1956 statements were secured from the plumbers who worked on or inspected the installation. In January 1956 the claimant received a report from a damage appraisal he had made which showed the damages to be in the amount of $26,000. In October 1957 the claimant offered to settle for $4,591.47, and the appellant rejected this offer. At the time of this rejection it had in its possession a copy of the above damage appraisal for the claimant, but claimant before suit did not make a definite claim for the amount shown in it. Before this rejection appellant had also rejected claimant's offer of $6,000 with a counter offer of $2,000. This counter offer was then repeated in the refusal of claimant's offer of $4,591.47 made in October 1957.

Near the end of 1957 claimant wrote the insured that suit would be filed shortly if settlement was not made, and appellant was advised of this letter. The suit was however filed in May 1959, and the appellant made an offer of $3,000 thereafter. Appellant's adjuster testified that he had inspected the house and was aware that it was damaged extensively and in an amount over the policy limits. The claimant's attorney after suit was filed indicated to appellant that he would discuss nothing but a figure of somewhere around $20,000. Appellant's consulting engineer inspected the house in 1956 and several times in 1960. As mentioned, the claimant was successful in his suit against appellee, and the jury awarded a judgment of $26,000.

The damage to claimant's house was caused by water soaking into the clay under the slab foundation. This caused the clay soil to expand and thereby to cause the walls to crack and the doors and windows to jam. It appears that the damage was progressive and the water apparently came from a leak in a water pipe under the house.

As indicated above, the parties had entered into a contract of insurance which set out the limits of the coverage for property damage. The contract also set out in some detail the relationship of the insurer and the insured as to many matters, but did not specify the obligations to each other in the matter of negotiation and settlement of claims made against the insured. The policy provided that the insurer would have control of litigation; that it must defend the insured against any suit, and that it "may make such investigation, negotiation and settlement of any claim or suit as it deems expedient; * * *." This permissive language as to settlement of claims or suits is by the majority of modern authority held to place a variously described duty on the insurer to settle. This duty is generally considered to arise from the insurer's control over the decision to settle within the policy limits. This control raises a distinct possibility of a difference of opinion as to whether a settlement within the policy limits should be made or not. The insurer's power over the decision to settle thus can involve and affect the insured's pocketbook, and since the interests of both are involved, the one with the control must consider the effect of its decision on the other.

The appellant's principal arguments, although specific points are indicated, center about the standard or test to be applied to the manner in which it handled the investigation of the claim and...