Lead Opinion
Thе plaintiffs, Larry Luke, individually and as the administrator of the estate
The plaintiffs alleged that American Family wrongfully denied coverage under its policy with Llewellyn. Plaintiffs further charged that the company in bad faith failed to settle within the policy limits of its insured’s policy. Both parties moved for summary judgment. The trial court found that coverage existed but refused to allow damages in excess of the policy limits.
The insured owned a 1966 Pontiac which was covered by American Family’s liability policy No. 40-054467. On October 15, 1966, while the 1966 Pontiac was in possession of the insured’s estranged wife, Llewellyn purchased for $460 under a conditional sales agreement a 1959 Oldsmobile for his use from Wilson Motor Company of Sioux City, Iowa. An Iowa certificate of title was issued in Llewellyn’s name with the car dealer holding it for security. Llewellyn made no effort to insure this car.
On January 15, the Oldsmobile became disabled with engine trouble, and Llewеllyn had Wilson Motor tow the car to their garage. Llewellyn still owed $350 on the purchase price. On January 31, 1967, Wilson Motor Co. legally repossessed the Oldsmobile and transferred the title back to its name, however, Llewellyn could have reacquired the title by payment of the contract balance before February 9, 1967. Wilson Motor Co. later sold the car for salvage. On January 16, the day after Llewellyn had Wilson Motor tow in his Oldsmobile, he purchased a 1967 Pontiac from another car dealer in Sioux City. On February 4, 1967, Llewellyn, while intoxicated and driving on the wrong side of the road, was involved in the accident with the Luke family. He was subsequently convicted for manslaughter and sent to prison.
The basic issue as to coverage concerns the “newly acquired automobile” clause under Llewellyn’s insurance contract with American Family. The clause reads:
“Owned automobile means b. a private passenger or utility automobile ownership of which is acquired by the named insured during the policy period, provided the named insured within 30 days after its acquisition notifies the company thereof and of his election to make the insurance afforded by this and no other policy . issued by the company applicable to such automobile and . (2) the company insures under the Liability Coverage, all private passenger and utility automobiles owned by the named insured on the day of its acquisition . . . .” (Emphasis ours.)
American Family denied coverage arguing that Llewellyn was still the legal title holder to the uninsured Oldsmobile on the date of acquisition of the 1967 Pontiac, therefore, it did not insure all automobiles owned by the insured on that date. As a result automatic coverage of the 1967 Pontiac was not afforded.
The district court held that the 1967 Pontiac was covered under the policy since the 1959 Oldsmobile was not an “owned” automobile within the meaning of the “newly acquired automobile” provision at the time the 1967 Pontiac was purchased. We affirm this ruling.
American Family contends that the construction of the newly acquired automobile clause is controlled strictly by the
Other courts construing the same provision have almost uniformly defined an owned automobile within the policy coverage as an operable automobile, one capable of being used on the streets and highways. See e. g., Glens Falls Insurance Company v. Gray,
The 1959 Oldsmobile in the present ease was disabled with engine trouble; in fact, Wilson Motor was able to sell it for only $75 to a salvage dealer (the car was “junked out”). After January 15 the Oldsmobile was at all times in the possession of Wilson Motor, and Llewellyn showed no intention of reclaiming it. Moreover, on the day following the vehicle’s failure Llewellyn unsuccessfully attempted to purchase a replacement automobile from Wilson Motor, and later that day he bought the 1967 Pontiac from another dealer. Thus, we agree with the trial court that a reasonable construction of American Family’s policy would not include the inoperable and abandoned Oldsmobile as an owned automobile.
LIABILITY FOR EXCESS DAMAGES
The district court found that American Family exercised good faith in refusing to provide coverage and therefore was not liable for damages over the limits afforded. In Kunkel v. United Security Insurance Company of New Jersey,
“The trial court submitted the matter to the jury under the bad faith rule which we believe to be the better rule and the one prevailing in the majority of jurisdictions and we approve it. . However, . . . the*1019 character and extent of the insurer s negligence are factors to be considered by the trier of fact in determining if there is bad faith. The insured has the burden of establishing his claim by a preponderance of the evidence.”3
The federal district court acknowledged two lines of authorities, one holding that good faith in refusing to defend is not a valid defense in an excess action where there has been a reasonable offer to settle,
Although this court gives special weight to the determination of local law by a federal district judge, a court of appeals cannot be irrevocably bound by a district judge’s choice of one of two or more alternative rules to follow in a diversity ease.
In the instant case American Family was presented with several demands by the plaintiffs and its assured to settle the three cases for $49,000 which was within the limits of the $25,000-50,000 policy. These demands were repeatedly ignored. At one time the plaintiffs offered to hold their suits in abeyance to provide the company an opportunity to file a declaratory judgment suit to determine whether coverage was provided. Although the liability of the company’s assured was clear, and the potential damages for the wrongful death of the infant and for the serious injuries to the other plaintiffs were obviously greater than the policy limits, the company refused to consider both settlement and declaratory relief.
The rule announced by the South Dakota court in Kunkel is not apposite in determining the precise problem before us. Kunkel involvеd an insurer who assumed its obligation to defend its assured but exercised bad faith in refusing to settle within the policy limits. There exists an important difference between the liability of an insurer who performs his obligation to defend the insured but fails to exercise good faith in settling within the policy limits and an insurer who breaches his contract by failing to defend and who then rejects a reasonable offer to settle.
When it is alleged that the sole breach of duty by the carrier is its refusal to settle within the policy limits, good faith becomes the central issue to be decided. On the other hand, good faith is not relevant to an insurer’s wrongful breach of its contract to provide coverage. A breach of contract is never justified simply because thе offending party in good faith believed he was entitled to refuse performance. When a breach occurs the basic question then concerns the proper measure of damages which flow from the breach.
“An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensatе the insured for all the detriment caused by the insurer’s breach of the express and implied obligations of the contract. Certainly an insurer who not only rejected a reasonable offer of settlement but also wrongfully refused to defend should be in no better position than if it had assumed the defense and then declined to settle. The in*1021 surer should not be permitted to profit by its own wrong.”
See also Landie v. Century Indemnity Co.,
There exists another compelling reason for rejecting the company’s defense of good faith in denying coverage. By statute South Dakota has adopted a measure of damages for breach of contract which would allow recovery “for all the detriment proximately caused” by the breach. A more simple or explicit expression of the allowable damages can hardly be imagined. S.D.C.L.Ann. § 21-2-1 (1967) states:
“General measure of damages for breach of contract — Uncertain damages not recovered. — For the brеach of an obligation arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom. No damages can be recovered for a breach of contract which are not clearly ascertainable in both their nature and their origin.” (Emphasis ours.)
In Comunale v. Traders & General Insurance Company, supra,
“A breach which prevents the making of an advantageous settlement when there is a great risk of liability in excess of the policy limits will, in the ordinary course of things, result in a judgment against the insured in excess of those limits. Section 3300 of the Civil Code provides that the measure of damages for a breach of*1022 contract is the amount which will compensate the party aggrieved for all the detriment proximately caused by the breach, or which, in the ordinary course of things, would be likely to result from it. .
“It is clear that section 8300 of the Civil Code authorizes a recovery in excess of the policy limits, . . .”
Comunale is convincing authority for the proposition that this statutory measure of damages authorizes recovery for the entire judgment even though it exceeds the policy limits.
Comunale concerned an insurer who had wrongfully refused to defend and settle within the policy limits. The assured in Comunale, however, was able to employ competent counsel to represent him. In the present case not only did American Family refuse to defend or negotiate a settlement for Llewellyn, but it wrongfully abandoned its assured when he was unable to afford legal counsel and, because of his imprisonment, was unable to conduct his own defense. Cf. Siegel v. William E. Bookhultz & Sons, Inc.,
We find the entire judgment was the natural consequence and proximate result of the defendant’s breach of its obligation to defend its assured.
ATTORNEY FEES
Plaintiffs have also appealed under South Dakota law the denial of attorney fees against the insurer. S.D.C.L. Ann. § 58-12-3 (1967) reads:
“In all actions hereafter commenced against any insurance company, including any reciprocal or interinsurance exchange, on any policy or certificate of any type or kind of insurance, if it appears from the evidence that such company or exchange has refused to pay the full amount of such loss, and that such refusal is vexatious or without reasonable cause, the court, if judgment is rendered for plaintiff, shall allow the plaintiff a reasonable sum as an attorney’s fee to be recovered and collected as a part of the costs, provided, however, that when a tender is made by such insurance company or exсhange before the commencement of the action in which judgment is rendered and the amount recovered is not in excess of such tender, no such costs shall be allowed.”11
Plaintiffs bring this action under an assignment from the assured and as such possess his rights and claims. The issue of whether there has been a vexatious refusal or a refusal made without reasonable cause is one of fact depending upon the existing circumstances. Wilson v. Allstate Insurance Co.,
“(1) [Defendant conducted a thorough investigation into the facts relative to the existence of policy coverage; (2) Llewellyn was promptly notified of the decision to deny coverage; (3) the clause upon which coverage turns has not been interpreted by the state supreme court; and (4) the interpretation relied upon by the in*1023 surer in reaching its decision to deny coverage under the policy was not unreasonable.”325 F.Supp. at 1334 .
We find in the trial court’s discussion sufficient basis on which the denial of attorney fees can be affirmed. Even though good faith is not a valid defense for breach of the contract, good faith is essentially relevаnt to the issue as to whether the refusal was “vexatious or without reasonable cause.”
Judgment affirmed in part and reversed in part. The claim is remanded to the trial court for entry of judgment in accordance with our opinion.
ON REHEARING EN BANC
Before MATTHES, Chief Judge, VAN OOSTERHOUT, Senior Circuit Judge, and MEHAFFY, GIBSON, LAY, HEANEY, BRIGHT, ROSS and STEPHENSON, Circuit Judges, en banc.
On motion for rehearing it is urged that the South Dakota statute, S.D.Code Ann. § 21-2-1 (1967), governing damages for breach of contract is not applicable in measuring damages arising .from the insurer’s failure to settle within the policy limits. However, assuming arguendo that this is true, under the facts of this particular case, we would reach the same result in holding that the insurer is liable for the damages over and above its policy limits.
Assuming the statute is not applicable, the insurer’s liability must be measured by the “bad faith” standard set forth in Kunkel v. United Security Insurance Company of New Jersey, 84 S. D. 116,
Applying the Kunkel rule of bad faith, it remains undisputed on the present record that the insurer failed to fulfill its responsibility to its insured. The record shows that once the insurer refused coverage it failed to investigate further or even consider the likelihood of excess damage to its insured in light of the facts and circumstances of the case. Under the facts existing here we hold the insurer was guilty of bad faith in refusing to settle as a matter of law.
The dеfendant urges, however, that a finder of fact should be able to consider the “good faith” of the insurer in denying coverage as one of the factors in considering its good faith in refusal to settle. We reject this argument for the reasons set forth by Judge Van Oosterhout in Western Casualty & Surety Company v. Herman,
We, therefore, reaffirm our prior holding.
Circuit Judges VAN OOSTERHOUT, LAY and HEANEY adopted our prior opinion; Chief Judge MATTHES and Circuit Judges MEHAFFY and ROSS concur only on the basis set forth in this opinion filed on rehearing.
Notes
. Iowa Code Ann. § 321.45 reads in part:
“2. No person shall acquire any right, title, claim or interest in or to any vehicle subject to registration under this chapter from the owner thereof except by virtue of a certificate of title issued or assigned to him for such vehicle or by virtue of a manufacturer’s or importer’s certificate delivered to him for such vehicle . . . . ”
. It should be noted that “[i]n general the ‘newly acquired automobile’ clause is intended for the benefit of the insured and should be liberally construed in his favor.” Glacier General Assurance Company v. State Farm Mutual Automobile Insurance Company,
. In adopting this position the South Dakota Supreme Court rejected those decisions which premise liability on evidence of negligence. See generally, 14 Couch on Insurance 2d § 51.5 at 510-511 (1965).
. See e. g., Herman v. Western Casualty & Surety Co.,
. See e. g., State Farm Mutual Automobile Ins. Co. v. Skaggs,
. This circuit has often stated that where the trial judge arrives at a permissible conclusion with respect to the law of his state, such conclusion will be binding on appeal. H. K. Porter Co. v. Wire Rope Corporation of America, Inc.,
Other circuits have not “bound” themselves to the district judge’s initial choice of state law. Rather, they tend to accord “great weight” to the district court’s determination of local law unless they believe it to be clearly erroneous. See e. g., Freeman v. Heiman,
. It is generally held that where the only wrongful act of the insurer is the refusal to defend, the liability of the insurer is ordinarily confined to the limits of the policy. Fidelity & Casualty Co. of New York v. Gault,
. See note 5, supra. The cases holding that good faith in refusing coverage is a proper defense to excess liability fail to offer any reason for the adoption of the rule. The apparent rationale seems to be that since bad faith must be shown on the refusal to settle it necessarily follows that the same rule is applicable when there has been a refusal to defend.
Most legal commentators have rejected the good faith defense to excess liability when applied to the carrier’s decision not to defend. Cf. Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv.L.Rev. 1136 (1954). See also 47 Geo.L.J. 601 (1959); 57 Mich.L.Rev. 775 (1959); 107 U.Pa.L.Rev. 571 (1959); 10 Hastings L.J. 198 (1958).
. The annotation to South Dakota Statute 21-2-1, under “source” cites earlier South Dakota statutes and Section 3300 of the California Civil Code.
. The states of Montana and North Dakota have similar statutes and their supreme courts follow the same rationale as Comunale. Lewis v. Mid-Century Insurance Co.,
. This statute was amended in 1972 to provide attorney fees on appeаl as well.
. It is likewise doubtful whether the issue of vexatious or unreasonable refusal to provide coverage is one for a jury to resolve. By statute the attorney fees are to be determined and awarded by the court.
Concurrence Opinion
separately concurring and dissenting, in which GIBSON and STEPHENSON, Circuit Judges, join.
I join in the concurring and dissenting opinion of Judge Stephenson but add my additional views in this case. I feel this case is important, relating, as it does, to the imposition of liability upon an insurer to pay to claimants an amount in excess of policy limits.
The obligation of the insurer toward its insured needs to be evaluated realistically, not by way of hindsight. In this
Given the paucity of authority on the subject, we believe the insurer was entitied to view its policy defense as meritorious and justified, subject only to the usual vagaries and uncertainties of litigation.
The panel hearing this appeal initially, on the basis of the Comunale
As I understand the opinion on rehearing, three judges not on the original panel and the three concurring and dissenting judges reject the application of the Comunale rule to this case. Although the strict liability rule in Comunale has been frequently cited, this rule has been infrequently applied.
Moreover, the Comunale decision was based upon a particular interpretation of California contract law, which is distinguishable from the construction given by the South Dakota Supreme Court to sections of the South Dakota Code which deal with the measure of damages flowing from breach of contract.
When the action is for breach of contract, plaintiff is entitled to recover all his detriment proximately caused by the breach, not exceeding the amount he would have gained by full performance. (Emphasis supplied) [Id. at 123.]
The limiting phrase emphasized in the above quotation casts grave doubt upon the applicability in South Dakota of the sweeping pronouncement of Comunale.
The strict liability doctrine of Comunale represents a minority view which I do not believe would be followed in South Dakota and which the trial court properly rejected.
Courts seem to have applied three different rules in circumstances analogous to those in the instant case, as follows:
1) A rule that a good faith but mistaken declination of coverage insulates the insurance carrier from an excess judgment for refusal to accept an offer of settlement within the policy coverage. This is the rule which Judge Nichol applied in the trial of this case and which was also applied by the Fifth Circuit in Beck v. Pennsylvania National Mutual Cas. Ins. Co.,
2) The Comunale rule, Comunale, supra, 50 Cal.2d 654,
3) A middle view which holds an insurer liable for more than the policy limits when the insurer, after declining coverage in good faith, is shown tо have failed to exercise good faith in refusing to settle or consider settlement of the claim within the limits of the policy. I construe the following cases to reflect this view: Western Casualty & Surety Co. v. Herman,
The initial panel opinion adopted the second rule. Although the majority of judges sitting en banc adopt the third rule, three judges of this en banc court join in the reversal of the district court for an alternate reason. These judges hold that, in considering whether a refusal to settle is in good or bad faith, the trier of fact should not give weight to a policy defense held in good faith by the insurer. I believe this view to be erroneous.
The rule applied does not reflect South Dakota law. I notе with interest that the majority of this court has adopted this rule as the law of South Dakota without giving the trial judge an opportunity to state his views of South Dakota law.
Good faith is a broad and comprehensive term. Whether an insurer had adhered to it usually depends upon circumstances and elements involved in a particular cаse. The decision not to settle must be thoroughly honest, intelligent, and impersonal. It must be a realistic decision tested by the expertise which an insurer necessarily assumes under the terms of its policy. * * *
* * * While no single satisfactory test has been formulated as to what constitutes good or bad faith courts uniformly hold that the insured’s interests must be considered. It appears to have been most frequently held the insured’s interests must be given “equal consideration” with those of the insurer * * *. [168 N.W.2d at 726 .]
In light of this language of the Supreme Court of South Dakota, the majority has ignored the local law in this diversity case contrary to the mandate of Erie Railroad Co. v. Tompkins,
In summary, the majority of judges on this en banc court have disapproved of the application of the per se rule of the Comunale case, discussed above. I join in this disapproval.
The mаjority of the court, however, have ruled that the insurer’s good faith policy defense should not be considered as a factor in determining whether the insurer’s refusal to settle a case was in bad faith. I join Judges Gibson and Stephenson in rejecting this theory. Bad faith, or its converse good faith, is discernable only by taking into account all the circumstances of a particular case. The strength of a policy defense plays an important role in the evaluation of a settlement offer. Logically, this factor should be assessed in determining the existence of good faith of the insurer in refusing a settlement offer. In this case, that offer was for almost the full amount of the policy limits. I do not believe the views of the majority can bе justified on the basis of sound judicial policy applicable to cases of this kind nor as consistent with South Dakota law as reflected in Kunkel, supra.
Accordingly, I would remand this case to the district court for its further consideration.
. For instance, the case of Canal Insurance Co. v. Brooks,
. Comunale v. Traders & General Ins. Co.,
. The panel decision has cited Western Casualty & Surety Co. v. Herman,
From this fact situation the jury could well have found, as they did, that the [insurance] company acted in bad faith in refusing to settle. [Landie, supra,390 S.W.2d at 566 .]
. The pertinent sections read :
For the breach of an obligation arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result*1025 therefrom. No damages can be recovered for a breach of contract which are not clearly ascertainable in both their nature and their origin. [S.D.C.L. § 21-2-1 (1967).]
Notwithstаnding the provisions of these statutes, no person can recover a greater amount in damages for the breach of an obligation than he could have gained by the full performance thereof on both sides [with exceptions not here applicable], [S.D.C.L. § 21-1-5 (1967).]
. In fact, the majority has completely disregarded the obligation to give “special weight” to the determination of local law by a district judge. Panel slip opinion at 7. Although the district court, on determining good faith, initially gave conclusive weight to the insurer’s assertion that it did not believe the insured to be covered under the policy, the majority has declined to allow the trial judge to determine whether, under South Dakota law, a refusal to grant policy coverage made in good faith is even a factor in assessing whether a rejection of a settlement offer was made in good faith.
Concurrence Opinion
concurring and dissenting.
We concur with the majority in affirming the trial court’s finding of coverage. We dissent on the excess liability issue.
We specifically reject the contention that South Dakota would apply the rule of Comunale
It is our view that the ultimate test to be applied under South Dakota law in determining whether an insurer is liable for damages in excess of the policy limits is, “was the insurer guilty of bad faith in refusing to settle within the policy
“We think an insurer, under circumstances such аs depicted in this case, is justified in accepting as true the information given it by its named insured which has a bearing on the liability of the insurer under its policy, and that the insurer can act reasonably on the basis of the information without being guilty of bad faith.”
The above case demonstrates the fundamental unfairness of a “refusal to defend at your own risk” doctrine.
In the matter at hand the trial court held as a matter of law that the defendant was not guilty of bad faith in its denial of coverage and refusal to defend, and therefore, denied the claim for damages in excess of the policy limits.
. Commuale v. Traders & General Ins. Co.,