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Farmers Ins. Exchange v. Henderson

Supreme Court of Arizona

June 26, 1957

FARMERS INSURANCE EXCHANGE, a business association, Appellant,
George V. HENDERSON and Helen W. Henderson, husband and wife, Appellees.

Page 405

[82 Ariz. 337] Fennemore, Craig, Allen & McClennan, Philip E. von Ammon, Phoenix, for appellant.

Norman Herring, Tucson, for appellees.

WINDES, Justice.

The appellant, Farmers Insurance Exchange, issued to appellee, George Henderson, a public liability insurance policy insuring him against claims for death or bodily injury and property damage resulting from the operation of Henderson's car. The limits of the policy for death or bodily injury was $5,000 for one person and $10,000 for one accident and $5,000 for property damage. There was a collision between the Henderson car when operated by his employee, one Whitehead, and an automobile operated by Charles Breesman. Three actions were filed for damages resulting from the accident. One action was by an occupant of the Henderson car against Henderson, Whitehead and Breesman, one by an occupant of the Breesman car against Henderson and Whitehead, and one by Breesman against Henderson and Whitehead. This latter action was tried in the superior court. The present case is a suit by Henderson against the company for damages claimed to have resulted from the failure to settle the Breesman claim for an amount within its policy limits when opportunity was presented for such settlement. A jury trial resulted in a verdict and judgment against the company in the sum of $45,000. The company appeals. The appellant will be referred to as the company and individuals by name.

The principal questions presented for solution are the extent of the obligations of the insurer to the insured to settle within the policy limits a claim against the insured and, if liability is established, the correct measure of the insured's damages.

[82 Ariz. 338] The policy was that is known as a standard automobile insurance policy, containing the usual provisions requiring the company to defend any suit against the insured and giving the company the right 'to make such investigation and settlement of any claim or suit as it deems expedient'. The jury answered a special interrogatory that the company did not act in good faith when it refused to settle. A principal point raised by the company is that the evidence is not such as to legally justify the jury in finding bad faith on the part of the company.

There has been much litigation in other jurisdictions resulting in declarations of an insurer's obligations to the insured when exercising the right to decide whether a claim under the policy shall or shall not be settled within the policy limits when there is a possibility of the claim exceeding such limits. There has been no expression from this court on the subject. The law in this regard is of comparatively recent development and the cases are not entirely harmonious. There is now no serious disagreement that when a company assumes control of litigation based on a claim covered by the policy, it cannot in deciding whether settlement is to be made seek only

Page 406

to protect its own interest but must give some consideration to the protection of the insured's interest in the event there is a possibility of a judgment exceeding the policy limits. Annotation, 40 A.L.R.2d 168, 181. An insurer which completely ignores the interests of the insured under such conditions could not be said to have acted in good faith.

The principal difficulty experienced by the courts has been in fixing a test for the degree of consideration the insurer must give the insured's interests in order to have met its legal obligation in this respect. Different standards have been adopted. There is authority to the effect that the insurer may give paramount consideration to its interests. Wisconsin Zinc Co. v. Fidelity & D. Co., 162 Wis. 39, 155 N.W. 1081; Hillker v. Western Auto. Ins. Co., 204 Wis. 1, 231 N.W. 257, 235 N.W. 413. Other jurisdictions have said paramount consideration must be given to protect the insured. Tyger River Pine Co. v. Maryland Casualty Co., 170 S.C. 286, 170 S.E. 346. A third position is that the insurer must give equal thought to the end that both the insured and the insurer shall be protected. American Fidelity & Casualty Co. v. G. A. Nichols Co., 10 Cir., 173 F.2d 830; National Mutual Casualty Co. v. Britt, 203 Okl. 175, 200 P.2d 407, 218 P.2d 1039. The latter standard was adopted by the trial court and we approve. It occurs to us that when the insurer is defending litigation against the insured, employs attorneys to represent the interests of both and has sole power and opportunity to make a settlement which would result in the protection of the insured against excess liability, common honesty demands that it not be moved by [82 Ariz. 339] partiality to itself nor be required to give the interests of the insured preferential consideration. A violator of this rule of equality of consideration cannot be said to have acted in good faith. Fidelity & Casualty Co. v. G. A. Nichols Co., supra. The enunciation of the rule is not difficult but its application is troublesome. It is a matter of consideration of comparative hazards.

With reference to the particular circumstances of this case, there was evidence that on February 16, 1953, Breesman offered to settle his claim for $5,000 personal injury and about $1,300 property damage. Ten days later the attorneys for the company wrote a letter to its branch claims manager that related in detail the information they had and made the following recommendation:

'In view of the rather strong case of negligence which the plaintiff can establish and the fact that his injuries were admittedly serious although there will be a conflict in evidence as to their permanence and in further view of the fact that we must rely largely upon the testimony of Alice Jacobson and Eddie Whitehead who in our opinion are weak witnesses and rather unpredictable as to what they will say upon cross examination, it is our recommendation that an attempt be made to settle the case for an amount in the neighborhood of $2500.00.'

On March 5th, the personal attorneys for Henderson wrote the attorneys for the company advising the acceptance of any offer of settlement for an amount of $4,000 or less, and advising that if such an opportunity were presented and the trial resulted in a judgment exceeding the policy limits, they would insist that the company pay the full amount of the judgment. Five days later Breesman offered to settle his personal injury claim for $4,000 and the property damages estimated at about $1,300. These offers were rejected and the case went to trial on March 12th. While the jury was deliberating, an order was presented to settle for $6,000 which was not accepted by the insurer. The jury returned a verdict of $18,284. The company appealed offering to pay the cost of a supersedeas bond. Henderson advised the company he was unable to furnish the bond for the reason he did not possess the requisite collateral which the surety company required.

While the appeal was pending, execution issued and Henderson's business property

Page 407

(a laundry) was levied upon. Thereafter, Breesman offered to stay the sale under execution pending a disposition of the appeal if the insurance company would pay the full limit under the policy in the sum of $6,500. This plan was rejected by the company for the reason that it could secure no assurance that in the event the case was reversed, it would be repaid the $6,500. [82 Ariz. 340] In this connection the company offered to pay $8,000 and dismiss the appeal if Henderson could make a satisfactory settlement with Breesman for the excess liability. The property was sold under execution to Breesman for $4,000 subject to encumbrances and the judgment credited. The case on appeal was reversed by this court with direction for a new trial. Henderson v. Breesman,77 Ariz. 256, 269 P.2d 1059. Thereafter, the company settled with Breesman for $6,200 of which $4,000 was paid direct to ...

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