Western Casualty and Surety Company v. Herman

• Decision Date: 31 December 1968
• Docket Number: No. 19011.,19011.
• Citation: 405 F.2d 121
• Parties: WESTERN CASUALTY AND SURETY COMPANY, Appellant, v. Mark L. HERMAN, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

405 F.2d 121 (1968)

WESTERN CASUALTY AND SURETY COMPANY, Appellant, v. Mark L. HERMAN, Appellee.

No. 19011.

United States Court of Appeals Eighth Circuit.

December 31, 1968.

Don B. Sommers, St. Louis, Mo., for appellant.

Jean Paul Bradshaw, of Neale, Newman, Bradshaw, Freeman & Neale, Springfield, Mo., for appellee; Warren S. Stafford, Springfield, Mo., on the brief.

Before VAN OOSTERHOUT, Chief Judge, and GIBSON and BRIGHT, Circuit Judges.

VAN OOSTERHOUT, Chief Judge.

This is an appeal by Western Casualty and Surety Company (Western) from a judgment against it for $66,558 in favor of Mark L. Herman, its insured under its automobile liability policy. On May 25, 1957, Leo Newman while riding as a passenger in the insured automobile suffered very severe personal injuries, the extent of which are not here questioned. Such injuries were caused by the negligent operation of the insured automobile by Mark L. Herman.

On February 26, 1963, Newman obtained a default judgment against Herman for $91,558 as damages for the injuries he sustained. Western paid its policy limit of $25,000 and interest on such judgment. The judgment before us represents the amount of the Newman judgment reduced by the $25,000 payment. Liability is predicated on failure of Western to honor the contractual obligation contained in its policy to defend and upon Western's bad faith refusal to settle the Newman claim within policy limits when opportunity so to do was afforded and insured had demanded the settlement be made.

This case was tried to Chief Judge Harper on a stipulation of facts without a jury. Judge Harper, in an excellent opinion reported at 271 F.Supp. 502, fully and fairly sets out all material facts, makes his finding, states and applies the applicable Missouri law and determines that Western is obligated to its insured for the unpaid portion of the judgment above policy limits. We affirm.

Two duties owed by the insurer to the insured are here involved, to wit, (1) the duty imposed by the policy to defend the insured (including omnibus insureds) and (2) the duty to exercise good faith in considering an opportunity to settle a claim within policy limits when demand for settlement is made by the insured.

Western's duty to defend, as pointed out by Judge Harper, is conclusively established in favor of Herman by our decision on such controversy in a declaratory judgment action brought by Western. See Western Cas. & Sur. Co. v. Herman, 8 Cir., 318 F.2d 50, 1 A.L.R.3d 1184 (June 13, 1963). Western concedes that its duty to defend is established. It has recognized its obligation on its policy to pay the judgment to the extent of its policy limits and has paid the limit provided by its policy upon the judgment.

With respect to the insurer's duty to exercise good faith, the trial court held that the good faith requirement related to good faith in considering an available settlement within policy limits and that a good faith belief that no coverage existed, standing alone, would not constitute a defense to a refusal to settle. Upon this issue, the court states:

"The Landie case points out that the question of bad faith is not the question of whether the insurer\'s position with respect to coverage was in bad faith, but rather whether the insurer acted in bad faith in refusing to settle within the policy limits. One need but consider the injuries to Leo Newman to answer that question, and there is no contention made that the judgment for $91,558.00 is excessive.

"Good faith in this case required the defendant to give consideration to the insured\'s interests in passing upon the settlement offer, regardless of the pendency of the declaratory judgment action. See Radcliffe v. Franklin National Insurance Co., 208 Or. 1, 298 P. 2d 1002. The defendant gambled on the question of policy coverage and lost. They are required to pay the consequences." 271 F.Supp. 502, 506.

Western's principal contention upon this appeal is that the court erred in determining that its good faith belief that no coverage existed constitutes no excuse for its failure to settle. The parties agree that Missouri law controls and that Landie v. Century Indem. Co., Mo.App., 390 S.W.2d 558, controls the decision in this case. A careful reading of Landie satisfies us that Judge Harper in the case before us properly interpreted and applied the Missouri law. The Tenth Circuit in Foundation Reserve Ins. Co. v. Kelly, 10 Cir., 388 F.2d 528, points to the conflict of authority on the issue we are considering and accurately summarizes the holding of Landie and Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 328 P.2d 198, 68 A.L.R.2d 883, relied upon in Landie, as follows:

"The theory of these cases is that notwithstanding an honest belief by the insurer that the policy is not in effect the company must in good faith consider offers for settlement within the limits of the insurance policy." 388 F. 2d 528, 531.

The Tenth Circuit applies such rule to the case before it, which arose in New Mexico. In footnote 5 the court sets forth the reasoning upon which the California court based its decision.

There is controversy in the decided cases as to what constitutes bad faith in refusing to make a settlement within policy limits. See State Farm Mut. Auto. Ins. Co. v. Jackson, 8 Cir., 346 F.2d 484, 488; Milbank Mut. Ins. Co. v. Schmidt, 8 Cir., 304 F.2d 640, 644; Annot. 40 A.L.R.2d 168, 181. The test is thus stated in Landie:

"Bad faith is shown by the failure of the company to act honestly to save the insured harmless as it has contracted to do in its policy. Good faith requires the company to make any settlement within the policy limits that an honest judgment and discretion dictates." 390 S.W.2d 558, 563.

In our present case, lack of good faith in refusing to settle is conclusively established by the pretrial stipulation of the parties set out in the trial court's opinion. In such stipulation, Western states that absent the policy defense issue it would have settled the Newman claim for the full limit of its policy.

The trial court in its opinion upon the basis of undisputed evidence determines that prompt notice of the claim and suit was given Western and that Western was repeatedly requested to defend the Newman suit and refused to do so. Opportunity and demand for settlement within policy limits are clearly established. The Newman judgment was entered subsequent to the district court's determination that coverage existed but prior to our affirming judgment upon appeal. Western had notice of the hearing upon the default judgment and also had notice that Herman was not defending. Western persisted in its refusal to defend. There is no evidence of collusion in the obtaining of the judgment by Newman nor, as stated by the trial court, is there any contention made that the judgment obtained is excessive.

Western points to two factual...