Wolff v. Royal Ins. Co. of America, Nos. 17073

• Court: Supreme Court of South Dakota
• Writing for the Court: HURD; MILLER, C.J., HENDERSON, J., and MORGAN; SABERS; AMUNDSON; HURD, Circuit Judge, for WUEST; SABERS
• Citation: 472 N.W.2d 233
• Docket Number: Nos. 17073,17087
• Decision Date: 12 June 1991
• Parties: Chris WOLFF; Ruth A. Wolff; Melissa A. Wolff and Julie M. Wolff, Minors, By and Through their Guardian ad litem; Ruth A. WOLFF; Kenneth Kempf; and Don Romeo Agency, Inc., Plaintiffs and Appellants, v. ROYAL INSURANCE COMPANY OF AMERICA; Schenck Insurance Agency, Inc.; and Kenneth F. Schenck; Defendants and Appellees.

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472 N.W.2d 233 Chris WOLFF; Ruth A. Wolff; Melissa A. Wolff and Julie M.
Wolff, Minors, By and Through their Guardian ad litem; Ruth
A. WOLFF; Kenneth Kempf; and Don Romeo Agency, Inc.,
Plaintiffs and Appellants,
v.
ROYAL INSURANCE COMPANY OF AMERICA; Schenck Insurance
Agency, Inc.; and Kenneth F. Schenck; Defendants
and Appellees. Nos. 17073, 17087. Supreme Court of South Dakota. Argued Nov. 27, 1990.
Decided June 12, 1991.

Douglas Fosheim, Fosheim & Haberstick, Huron, Tim Engler and Gregory D. Barton, Harding & Ogborn, Lincoln, Neb., for plaintiffs and appellants.

Gary P. Thimsen, Woods, Fuller, Shultz & Smith, P.C., Sioux Falls, for defendants and appellees Schenck Ins. Agency and Kenneth Schenck.

Michael J. Schaffer, Davenport, Evans, Hurwitz & Smith, Sioux Falls, for defendant and appellee Royal Ins. Co.

HURD, Circuit Judge.

FACTS/PROCEDURAL HISTORY

An accident occurred while workers were dismantling the stage following Wayne Newton's performance at the 1983 South Dakota State Fair. A boom truck collapsed and injured two workers, Chris Wolff (Wolff) and Kenneth Kempf (Kempf). Kempf suffered a broken arm and Wolff was seriously injured and is now permanently disabled. Don Romeo (Romeo) and his son Bob Romeo own Don Romeo Agency, Inc. (Romeo Agency) which books entertainment for special events and was entertainment director for the 1983 South Dakota State Fair. Romeo attended the Wayne Newton concert and thus became aware of the accident. He did not immediately report the accident to his insurance agent Kenneth Schenck (Schenck) or his insurance carrier Royal Insurance (Royal) because he did not believe his agency had any liability for the accident.

Wolff and Kempf each filed a lawsuit in United States District Court in July, 1984 against Romeo Agency; Flying Eagle, Inc., Wayne Newton's production company (Flying Eagle); Pittman Manufacturing Company, the boom truck manufacturer (Pittman); and Four Star Productions, responsible for additional spotlights used at the concert (Four Star). Don and Bob Romeo also own Four Star. The district court consolidated the actions and also allowed other defendants to be joined, including a local and international union of stage hands.

Flying Eagle was granted summary judgment in federal district court and several other defendants settled with Wolff and Kempf. As a result, a few weeks before the scheduled July 30, 1987 trial date, only Pittman, Four Star, and Romeo Agency remained as defendants. In June 1987, Pittman and Four Star agreed to each pay $175,000 to settle the lawsuit. As the only remaining defendant, Romeo Agency offered to settle for $10,000. Wolff and Kempf demanded $200,000. After further negotiations, Wolff and Kempf offered full settlement in exchange for payment of $25,000 on condition that Romeo Agency provide proof that it was uninsured and unable to satisfy a larger judgment. Counsel for Romeo Agency telephoned Schenck and was informed that Romeo Agency was named as a co-insured on a policy of insurance issued by Royal to a company known as Mid-America. On June 24, Romeo Agency requested that Royal acknowledge coverage and undertake the defense of the district court lawsuit. Royal was given eight hours to decide and was provided a copy of the Kempf complaint but was not given a copy of the Wolff complaint. Royal denied coverage asserting that Romeo Agency failed to give timely notice of the claim as required by the terms of the insurance policy. The next day, Romeo Agency settled with Wolff and Kempf by agreeing to pay $25,000 and stipulating to a judgment in the amount of $275,000 in the District Court of South Dakota, Southern Division. Romeo Agency also assigned to Wolff and Kempf any and all rights it may have under the insurance policy issued by Royal. In exchange, Wolff and Kempf covenanted not to execute on the $275,000 judgment.

Wolff, Kempf and Romeo Agency filed suit in circuit court against Royal and Schenck. Wolff and Kempf sought to recover from Royal on the $275,000 district court judgment. Romeo Agency sought reimbursement for litigation costs it expended in defending the district court action. The trial court held that Wolff and

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Kempf could not recover from Royal on the district court judgment because it was obtained in bad faith and through collusion with Romeo Agency. We affirm the trial court on this issue. The trial court concluded that Romeo Agency was entitled to recovery of their litigation costs for defending the district court action. We reverse the trial court on this issue because the trial court erroneously held that Romeo Agency's oral notice was sufficient under the terms of the insurance policy. DECISION

WHETHER THE TRIAL COURT WAS CLEARLY ERRONEOUS IN FINDING THAT THE SETTLEMENT BETWEEN WOLFF AND KEMPF AND ROMEO AGENCY WAS UNREASONABLE, COLLUSIVE AND REACHED IN BAD FAITH.

In the circuit court action underlying this appeal, Royal and Schenck attacked the federal district court judgment alleging that the settlement between Romeo Agency and Wolff and Kempf was a result of bad faith and collusion. ¹

As a general rule, when an insurer declines coverage, an insured may settle rather than proceed to trial to determine its legal liability. Luria Bros. & Co. v. Alliance Assur. Co., Ltd., 780 F.2d 1082, 1091 (2nd Cir.1986). However, the amount must be reasonable in view of the size of possible recovery and degree of probability of claimant's success against the insured. Id. The insurer's denial of coverage must be unjustified before policy provisions, such as a cooperative clause, are considered waived. 44 Am.Jur.2d Insurance § 1421. The Nebraska courts have held:

If an insurer waives its right to defend, this leaves the insured free to defend the action to judgment or, in good faith, to make such settlement as ordinary and reasonable prudence and caution might indicate to be advisable.

Otteman v. Interstate Fire & Casualty Co., 172 Neb. 574, 111 N.W.2d 97, 102-3 (1961).

The trial court concluded that Romeo Agency's acceptance of Wolff's and Kempf's covenant not to execute was a sham and breached the cooperation clause in the policy. This conclusion is supported by the following evidence:

(1) neither Romeo, nor the attorneys involved, considered that Romeo Agency had a great amount of liability exposure concerning the accident and that, based on the testimony, Romeo Agency's potential liability was much less than that of Pittman or Four Star. Yet, Romeo consented to a judgment of $100,000 more than the settlement reached with Pittman and Four Star;

(2) Royal was given less than eight hours to determine coverage;

(3) the details of the ultimate settlement were cemented before the denial of coverage by Royal, but no information concerning this settlement was shared with Royal;

(4) Wolff's complaint was not forwarded to Royal;

(5) no mention of the parties who had settled nor the amounts of the settlement was brought to Royal's attention;

(6) the liability exposure was not presented;

(7) while the $25,000 settlement was conditioned upon proof of no insurance, the prior $200,000 offer (which was $75,000 less than the amount of the stipulated judgment) had no such limitation.

The evidence before the trial court supports its conclusion that Royal's denial of coverage in June 1987 was justified and the ultimate settlement was not one of reasonable prudence. Accordingly, the trial court's determination was not clearly erroneous

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and we affirm its determination that the stipulated judgment was unreasonable and...