Northfield Insurance Co. v. St. Paul Surplus Lines Insurance Co.

NORTHFIELD INSURANCE

COMPANY, Respondent, PAUL LINES INSUR

ST. SURPLUS COMPANY, A DIVISION OF the

ANCE INC., COMPANIES, Appel

ST. PAUL

lant.

No. C6-95-1738. Appeals

Court of of Minnesota.

March Dordell, Hansen, Brádt, Wayne P. P.

Gene Bradt, P.L.L.P., Dordell, Bradt, Odlaug & St. Paul, respondent. Laine, Bethany Culp, Op- M. K.

Edward Paul, Donnelly, penheimer, St. Wolff & appellant. HARTEN, by

Considered and decided MANSUR,* P.J., JJ. and HUSPENI OPINION HARTEN, Judge. Surplus Insur-

Appellant Lines St. (St.Paul) a ance Co. issued million insurance with a limit of $1 (Intertech), a manufac- Interteeh Resources products. Respondent turer of medical (Northfield) issued Northfield Insurance Co. liability insur- Intertech a million excess $5 action, policy. In ance the instant Paul, Paul, alleging sued that St. while St. defending products liability against a Interteefi, failed exercise considering an offer to settle the claim within policy. the limits of the insurance triаl, After a bench the district court found Paul had breached its damages of and it awarded Northfield million, represented which the amount $1.7 which Intertech’s exceeded primary policy’s limit. million $1 judgment. appeals now from the adverse We reverse.

FACTS May Roberta suffered injury permanent brain while hos- severe pitalized Angeles, Los California. injury Rupp’s experiencing from resulted hospital respiratory arrest after and cardiac personnel to administer a scheduled failed attending drug prescribed dose of Rupp’s subsequently physician. conservator against instituted a lawsuit California Intertech, hospital, physician, which product to resusci- had manufactured used Rupp. original tate Inter- part product that had tech involved emergency; during the fallen to the floor * VI, court, pursuant § serving pointment art. judge as Const. Retired of the district by ap judge Appeals of the Minnesota Court of attorney physician’s that the apparent the McNeil аnd the it became when remaining not have affected the claims two defendants part’s absence could Rupp alleged addi- each. Both product’s performance, be settled for could Intertech, recovery against attorney later physician’s tional theories of McNeil and proper about use including they a failure to warn testified that believed product. of the offer demand was an actual to settle. Intertech’s motion The trial court deniеd $50,000 conveyed McNeil the settlement 1992, summary and in June Leonard, Long but he was demand to reserve, increased its thereafter St. amount told that would of the represented its determination which Long later that she in settlement. testified value, $150,000. By No- settlement to suit’s a seri- did not believe that the demand was 1992, had exceeded its re- vember Intertech at that amount. McNeil ous offer to settle policy, under the and St. Paul tention amount Harney that Intertech would not offer told Joseph cоunsel for McNeil as substituted settlement, any amount in and there were Intertech, McNeil Intertech. On behalf of negotiations. physi- further settlement rejected a million settlement offer. $1 cian, of- having advised of the been reported to St. Paul that Intertech McNeil settle, fer, also to and the declined exposure to and that had little or no phase hos- of the trial continued without the had value. Kathleen the case no settlement pital. Intertech or St. Paul had not informеd supervisor, Paul claims Carol Long, a St. hospital the with the Northfield of Leonard, representative for St. Paul’s claims $50,000settlement offer. or the suit, agreed with an earlier the and McNeil liability phase the of the of At conclusion by initial coun- made Interteeh’s assessment trial, jury, to the case went the but percent a 75 to 90 sel that Intertech had of the trial court did not submit the issue prevailing question on the of at trial chance liability. liabili- hospital’s question of On liability. parties agreed, of All physician, favor ty, jury found in of likely any damages would ex- awarded Intertech, against it verdict but returned by policy limit several million ceed St. Paul’s corporate remaining defendant. the sole the trial court that dollars. McNeil advised verdict, and at Northfield was advised paid to the claim no amount would time, first about the settle- it learned against Intertech. jury delib- hospital. with While the by exposure was monitored Northfield’s damages, on the issue of erated Willard, who received аll relevant Gretchen against effected a settlement concerning up the suit information million, which St. Paul Intertech for $2.7 agreed trial. with the as- time of Willard North- policy limit of million and paid its $1 possible of Interteeh’s sessment paid million. This settlement field $1.7 McNeil, by Long, and Leonard. made light damage proved reasonable jury began in trial Califor- The bifurcated immediately jury verdict returned 22, March Leonard had told nia on 1993. thereafter. keep trial that she would Wil- Willard before developments, lard informed of all relevant ISSUES other defendants including settlements with holding district court err Did the changes Rupp’s settlement duty to exercise breach of its Paul liable for updated during the trial Leonard Willard offer to settle good faith in fact, 12, April telephone several times. against Intertech for an amount the claim 1993, the trial was told Willard that Leonard policy limits? within the favorably she progressing and that un- to recover day, 2. Was Northfield entitled keep Willard informed. Later thеory that St. Paul breach- hospital its alternate der Rupp settled the keep Immediately gratuitously to assumed million. ed approximately $2.6 reached, significant trial devel- informed of David Northfield after this settlement was attorney, opments? indicated Harney, Rupp’s

60 good

ANALYSIS not made and is not based upon grounds reasonable believe 1. An excess insurer is sub- the amount demanded is excessive. rogated rights to its insured’s shown; insurer for breach of the 388. Bad faith must be a mere judgment by settle. Iowa mistаke in the insurer is not Co., Nat’l Mut. Ins. Co. v. Family Auto-Owners Ins. sufficient. ‍​‌​‌‌‌‌​‌​‌‌​​​‌​​‌‌‌‌​​​‌‌‌​‌‌​‌‌‌‌​‌‌​‌‌‌‌‌‌‌​‍Peterson American 627, 486, (Minn.App.1985) (citing Mut. Ins. 280 Minn. (1968). Casualty Continental v.Co. Reserve Ins. 5, 8, (1976)), 307 Minn. The district court ruled that St. Paul (Minn. 1985). review denied Oct. Conse by failing breached its quently, Northfield was entitled to recover if inform or Intertech Northfield of the duty St. Paul breached its to Intertech to act by refusing grant settlement offer and good concerning faith settlement of the any authority McNeil following settlement against Intertech. disagree the offer. We do not with the dis trict court’s conclusion that Paul acted in St. Northfield’s supported by which is the follow following derives from the rule:. ing: St. Paul’s failure to reassess Intertech’s Minnesota, insurer, In having a potential liability after the settlement with right assumed control of the of settlement hospital; give equal its failure to consid insured, may of claims its become (and eration to the interests of Intertech undertaking liable excess of its under subrogees) considering settle policy the terms of the if it fails to exercise offer;1 Long’s rejection ment of the offer “good faith” in offers to com- solely based on her dislike or distrust of promise the claim for an amount within the Harney; St. Paul’s reserve for the policy limits. case; and St. Paul’s failure to advise Inter- Co., 384, Dairyland Short v. Ins. 334 N.W.2d tech or of the offer or the settle (Minn.1983). The insurer must view the hospital.2 ment with the if policy applied situation as limits Nevertheless, argues that it can- “give equal claim and consideration to the held good liable for breach of its exposure financial of the insured.” duty faith clearly because Intertech was not right 387-88. The insurer’s to control settle compelled agree. liable here.' We are negotiations pur is subordinated to the

pose 1926, of the insurance contract —to defend Since the stated test Minnesota indemnify required the insured. Id. at clearly 387. The has that the insured be lia- test is may as follows: ble before the insurer suffer for duty good breach of its of faith. In the good faith is reported earliest Minnesota cаse on the is- breached in in which situations the insured sue, court stated: clearly

is liable and the insurer refuses to policy within the limits and the deci- clearly [WJhere the insured is liable and policy settlement, sion not to settle within the limits is the insurer refuses to make a decision, light 1. continually noting of our we need not address that neither Northfield argument imper- St. Paul's that the district court nor Intertech ever demanded that St. Paul settle missibly hearsay based its decision on excluded limits, ignores within the St. Paul the fact $50,- regarding evidence the existence of a valid party that neither received sufficient information. note, however, 000 settlement offer. We Co., Lange Fidelity Casualty See v. & 290 Minn. Harney's while evidence of statement was inad- 61, 67-68, 881, (1971) (al- 185 N.W.2d 885-86 (i.e., prove missible to the matter asserted though generally insured must have demanded $50,000), actually settle accepted, requirement that an offer be does not evidence could have been admitted to show that apply where did insured not have sufficient ad- value” offer "nuisance was on the table and to concerning implications vice from insurer show that St. Paul understood that fact. is offer). refusing purposes these latter that are relevant to whether faith; good St. Paul breached its accord- ingly, the district court's were not conclusions regard. deficient in this cover- possible liability policy unlimited from a limited protecting the insured thus damages age. of the excess insurance, the refusal must amount of the Co., Casualty v. Anсhor 249 Minn. Larson upon reasonable good be made (1957) 376, 339, 350, (quoting 82 N.W.2d grounds for the belief that the amount v. Am B. Lumber New Frank Connet Co. required effect excessive. (8th Casualty 236 F.2d sterdam Elec. York Indem. Co. New Mendota Cir.1956)). Moreover, appellate Minnesota’s 211 N.W. 318-19 169 Minn. consistently prongs applied courts have both (1926) added). (emphasis first, whether the was test — later the test as follows: restated second, liable, clearly refus whether the opinion are of that the insurance We good determining fаith —in al to settle was validly company could have declined insurer has whether an breached good existed on offer of settlement if Short, 334 N.W.2d at 388- the insured. See First, good it in grounds. either two if (holding occurred where both breach its insured believed satisfied); Boerger, ‍​‌​‌‌‌‌​‌​‌‌​​​‌​​‌‌‌‌​​​‌‌‌​‌‌​‌‌‌‌​‌‌​‌‌‌‌‌‌‌​‍prongs 257 Minn. at were Second, of its in- even liable. 75-77, (same); at 135-37 Iowa certain, if it believed sured (no Nat’l, 371 N.W.2d at 629 breach where proposed at the faith that a settlement insurer acted faith and insured was figure required contribute which it wаs liable). clearly In no Minnesota ease has not jury the greater than the amount liability insurer been held liable to damages. as would award its insured or an excess insurer breach Boerger v. American Gen. Ins. duty good the insured was not its where (1959) 100 N.W.2d clearly underlying in suit. liable the Short, added). supreme (emphasis In the urges “clearly that the St. Paul therefore following adopted court the statement There be invoked here. is liable” standard test: clearly dispute that Intertech was not good is The insurеr’s fact, liable; parties and the district the in which the in- breached in situations agreement that the appear to be clearly is and the insurer sured liable an aberration. verdict Intertech was policy the limits to settle within refuses In- specifically stated that The district court the to settle within and the decision not clearly the not liable. Under tertech was good faith and policy is not made limits test, argues that refusal Boerger St. Paul grounds to upon is reasonable not based “in good it to settle was valid because demanded is ex- believe that the amount liable.” its insured was not believed that cessive. Boerger, Minn. at added). (emphasis In our at 388 issue, empha- we published sole ease this troubling than is This more quoting “clearly liable” in sized the words reported cases any of the other Minnesota test from Short. statement of the above good faith in involving insurer’s an Nat’l, 371 at 628-29. Iowa In no other considering settlement offers. the follow- supreme reject- court has stated differential between the case “clearly standard: ing judg- liable” rationale for eventual offer and the ed settlement large; case did the it so in no other say that be an ment safe to would seems offer constitute permit a amount of the settlement rule unwholesome which an value.” In the event of such of bad faith “nuisance liability insurer to be convicted offer, why might an insurer should compromise personal one ask having failed if verdict it action, be held liable for excessive justifiably believed it to not injury refusing even merit, faith in plaintiff in acted if the be without non-liability appeared a of the insured judg- if the obtain a verdict action should time, how- At the same foregone conclusion. excess of its the insurer ever, to settle not be forced virtually an insurer should policy liability. a rule would Such test, by A claim. more flexible giving an under a frivolous effect of have the which the likelihood of the insured’s The failure Paul to of St. advise Intertech important dramaticаlly would be an but not determinative Northfield of lowered factor, might therefore allow a more thor- settlement demand in the Califor- ough analysis per of all circumstances surround- nia case is bad faith se. On basis alone, ing problem the offer and better address the Northfield is entitled to its favor. arises cases such as the one before us. might argue One liable” Nevertheless, are considerations applies only standard to an insurer’s bad properly more addressed to thе settle, refusing faith in and that clear Nat’l, plaintiff court. never Iowa required pri- therefore made a settlement offer within the mary solely is based on a limits, argued but the excess insurer argument failure to communicate. Such pilmary nevertheless should have ef insurer rejected, must be however. fected such a settlement. 371 N.W.2d at 628-29. We noted that excess insurer While the failure to communicate essentially sought a modification of the Boer may settlement offer be one factоr in deter ger test: mining whether an insurer has breached its Appellant requests an extension of this faith, may it constitute principle. urges He us to hold a breach itself. The court has company insurance liable because of its stated: vigorously pursue failure to initiate and a determination of an im- settlement, regardless opinion of its as to portant question is whether the insurer

potential liability. proceedings, informed the insured of all concluding pri- including Id. at 629. After communication of settlement of- mary insurer had not acted bad faith and fers. clear,

that the insured’s was not we Short, added, (emphasis 334 N.W.2d at 389 stated: deleted). Short, emphasis other In the su Supreme The Minnesota Court is the preme court cited the in insurer’s failure this appropriate question forum to address a “[fjurther regard merely as evidence” of a regarding existing the extension of law. ‍​‌​‌‌‌‌​‌​‌‌​​​‌​​‌‌‌‌​​​‌‌‌​‌‌​‌‌‌‌​‌‌​‌‌‌‌‌‌‌​‍Larson, lack of faith. Id. In the su currently justi- There is no Minnesota law preme spoke “required duty” court of a of fying of the extension the bad faith rule informing the insured of settlеment offers. requests. that' excess We [the insurer] 352, 249 Minn. at 82 at 385. ruling therefore affirm the trial court’s Throughout Larson the court that ne- [the insurer’s] settlement right makes clear that the insured’s to recov gotiations did not constitute bad faith un- er derives from an insurer’s refusal to settle. present der law. fact, in Norwood v. Travelers Ins. 204 595, 600, (1939), Minn. 284 N.W. 787 recovery may court indicated that here, Similarly apply we are bound to solely not be based on the insurer’s failure to exists, presently the law it as and that law notify the insured оf a settlement offer. may states that a insurer not be Accordingly, we also hold that the duty held liable for breach of its of requirement may liable” not be circumvented clearly if the not insured was liable. Accord in this fashion. ingly, we hold that the district court in erred awarding judgment against Northfield Alternatively, Northfield ar Paul. gues that St. Paul was breaching liable for a

Although gratuitously duty it also found that acted assumed to Northfield to considering faith in keep significant settle- Northfield informed of all developments.3 ment the district court stated: trial Northfield relies on memorandum, 3. St. Paul asserts that Northfield did not raise its order and North- Although this issue before the district court. plead duty, field did the breach of such a and the fully theory district court failed to address this of

63 to the interests of the “equal consideration” Bell Tel. Abresch Northwestern (or (1956), subrogee) rejecting a set- in which insured 75 N.W.2d Be- court, limits. tlement within relying on Restate particular facts of Torts, I party gratu that cause believe held that a ment of eаse, Paul did not this which reveal that St. leads others itously assumes a of equal to the interests give must consideration rely performance of Northfield, bad faith performance. warrant in that Intertech and reasonable care exercise here, the district (citing would affirm at 210 Restate Id. at (1934)). (First) judgment in favor Northfield. § The of Torts of applied property that this tort court stated Although prior a test some cases enunciate injury. Id. at damage personal liability, not requiring cleаr I do believe (Sec 211; see also Restatement possi- courts intended foreclose the those (failure ond) (1965) § of to exercise Torts bility liability such as the one cases performance gratu reasonable care here, potential a millions where there was itously may give rise to liabili assumed damages an offer to settle of dollars harm). resulting physical ty for $50,000. only implications of a strict appar- may liability” requirement re were not not “clear conсlude We they theory. eases did Application of ent in those other because cover under this in val- to settle for “nuisance theory inappropriate here because involve refusal loss, fact, any language purporting to proper case involved financial ue.” stant Moreover, al- injury. could damage personal require insured’s clear ty or dicta, in no case essentially alleged negligence because most be considered Northfield hаs theory recovery, necessary but been pursuing this has standard i.e., rejected a in no has specifically has Minnesota supreme court outcome — in bad faith of a bad faith insurer acted negligence standard favor Larson, 355-56, settlement, yet been relieved 249 Minn. at standard. See an excess insurer because the insured or 82 N.W.2d at 386-87. underly- clearly in the was not liable Rather, every case turned on ing DECISION suit. all circumstances surround- consideration of specifically found district court ing refusal to settle. the insurer’s clearly in the liable Intertech was not Consequently, the district underlying suit. in v. American example, Peterson For judgment awarding Northfield erred in court Co., 482, 160 Family 280 Minn. Mut. Ins. duty to Paul breached its on its that St. (1968), the court held 541 N.W.2d to in offers exercise had shown.' The no bad faith been against Intertech within the the had informed that the insurer stressed limits, though St. acted policy even of an to settle within insured offer refusing the claim for faith in to settle bad limits, going but insured insisted value.” ‍​‌​‌‌‌‌​‌​‌‌​​​‌​​‌‌‌‌​​​‌‌‌​‌‌​‌‌‌‌​‌‌​‌‌‌‌‌‌‌​‍“nuisance 486, 160 544. at at Id. N.W.2d trial. Reversed. Cаsualty Similarly, Larson Anchor (1957), 376 249 Minn. MANSUR, (dissenting). Judge potential fully appraised of was The offers. of all settlement respectfully I dissent. the insurer did supreme court held that estab- majority insists that cases The reasonably in bad but acted act requiring the two-prong test a strict lish at to trial. taking the ease determining bad clear insured’s at by majori- liability. The cases cited Door & Sash & Again, Lawson Nelson each case must ty, stress that Corp., 204 Indem. Associated prevailing The Co. v. own on its facts. decided (1938), held suрreme court gave N.W. 481 the insurer be whether concern should judgment stage. mary by parties at the sum- issue addressed that the insurer was not liable for bad addition to this reaction to the offer and fully $50,000 where the insured was informed of all failure to inform the St. pertinent the case. Id. at facts 282 Paul’s bad faith is demonstrated its failure N.W. at 483-84. to inform Intertech or Northfield of the set- hospital; with tlement its failure reas- opinion in Iowa Nat’l Mut. This court’s potential liability sess Intertech’s after Ins. Ins. Co. v. Auto-Owners settlement; open and its refusal even to ne- (Minn.App.1985), N.W.2d 627 review denied gotiations attorney Harney with after the (Minn. 18, 1985), distinguishable is also Oct. $50,000 light potential of the dam- denying present from the case. bad faith $150,000 ages and St. Paul’s reserve for the" liability, emphasized that the claim we majority case. Even the concedes properly against the insured had been inves- acted bad faith. These facts show tigated, strategy trial that the insurer’s had beyond went St. Paul’s actions mere deficient, that the exer- bеen insurer had judgment. Proper mistake consideration respect cised faith with to settlement of all relevant facts leads to the conclusion negotiations, and that the insured had been that St. Paul should be liable for the excess kept fully informed. Id. 628-29. portion because it failed to cases, preceding In the the insurer was give equal consideration to the interests of absolved of bad faith because the any subrogees. Intertech and totality of the circumstances indiсated that precisely It is facts such as those before us It insurer did not act bad faith. is also public policy that demonstrate that is not important to note that in each the court served a strict adherence to a “clear specifically noted insured had been liability” requirement in involving cases “nui- kept fully significant develop- all informed of sance value” settlement offers. is self- ments, including settlement offers. percent evident that even a 99 likelihood of presеnt distinguishable case is from victory gives percent rise to a one chance of those cases in which the insurer was relievéd defeat; therefore, quite rationally one could liability. Paul’s failure to inform argue that all cases have at least some settle- Northfield and Intertech about the value, matter how An small. insur- especially reprehensible. offer is The dis- truly er if it should be held liable acted specifically trict court also found bad faith in rejecting faith in “nuisance vаlue” set- St. Paul’s reaction to the offer and its refusal tlement, honestly even it believed it would grant attorney McNeil au- win the suit the insured. Under a thority. The court found: standard, strict liable” an insurer testimony “Casey” Long of Kathleen escape liability, despite all could the most particularly damning. Despite the fact egregious conduct and a settlement offer of that defense counsel McNeil felt that the $500, simply as low as because the insured’s genuine, demand of Ms. proposition. wаs 50-50 will con- Paul, Long, on behalf of St. refused to required cede insurers should not be to any grant authority. to him settlement all frivolous suits. But courts must at doing nothing Her reasons for not so had assessing least have sufficient latitude an to do with how the California case had insurer’s bad faith to base its deci- point, to that nor been tried other totality sion on the of the circumstances. Rather, relevant matter. her decision clear, The need for a broader test is more evi- predicated uрon her dislike stated today ago, dent than decades when most of Rupp’s attorney. distrust of Her and/or reported cases on this issue were decid- action on behalf of constituted A gross ed. strict liable” standard does disregard of its insured’s interest. reckless, deliberate, comport litigation, not with modern where was a failure encouraged place of Intertech with is more than interests short, past, dispute equal footing. own on an it was and alternative forms of resolu- emрhasized an act of bad faith. tion are and even mandated. then, believe, prior precedent I do majority us to here. The

requires reverse leaving this issue

cites Iowa Nat’l appellant court. In that expand scope

sought to encompass a bad faith negotiate failed insurer a settlement within and obtain

better Nat’l, 371 at 629.

policy limits. Iowa effect, argued for a appellant there insurer there

new basis —the liable for could not held poli-

considering an to settle within the never such

cy limits because it had received appeals correctly

an offer —and the court role that it court’s

decided liability. does not

to create here, claim is for its

seek a similar extension to exercise

that St. failed limits. offer within here; clear therefore ‍​‌​‌‌‌‌​‌​‌‌​​​‌​​‌‌‌‌​​​‌‌‌​‌‌​‌‌‌‌​‌‌​‌‌‌‌‌‌‌​‍Paul’s bad faith is affirm.1 Minnesota, Respondent,

STATE HOLMBERG,

Larry & Roses Buns d/b/a Buchanan, (C5-95-1164), Dennis d/b/a (CX-95-1578), Inc., Group, Excalibur

Appellants. C5-95-1164,

Nos. CX-95-1578. Appeals of Minnesota.

Court 26, 1996.

March May

Review Denied amount, probable than tively it is more majority small agree the district 1. I with the not have sustained impermissibly that Northfield would based on was not court's decision nego- seriously argument undertaken such reject loss had hearsay. also Paul's court’s conclusion The district here. tiations. failed to show causation that Northfield has damages "as a $1.7 suffered million rea- evidence admitted district good faith” failure to exercise plaintiff result of St. Paul’s sonably supports a conclusion that erroneous. willing negotiate for a rela- is not a settlement

Case Details

Case Name: Northfield Insurance Co. v. St. Paul Surplus Lines Insurance Co.

Court Name: Court of Appeals of Minnesota

Date Published: Mar 26, 1996

Citation: 545 N.W.2d 57

Docket Number: C6-95-1738

Court Abbreviation: Minn. Ct. App.