Summary
In Carter, however, the entry of excess judgment at issue was due to a trial verdict against the insured, and the issue before the court was whether the adjudicated excess judgment could be recovered from the insurer by an insolvent estate, which seemingly could not be damaged by such a judgment.
Summary of this case from Romstadt v. Allstate Ins. Co.Opinion
No. 80-1259
Decided July 8, 1981.
Insurance — Automobile — Excess judgment against insured's estate — Recovery against insurer sustained, when — Insolvency of insured's estate — No effect.
1. An entry of judgment against an insured's estate in excess of the insurance policy limits is sufficient damage alone to sustain a recovery from the insurer if it is adjudicated that there was a breach of duty by the insurer in defending the insured's estate.
2. Upon the adjudication of an insurer's bad faith in defending an insured's estate, an excess judgment may be recovered from the insurer despite the insolvency of the estate.
APPEAL from the Court of Appeals for Cuyahoga County.
Jack Pelfrey and his spouse, Nancy Pelfrey, had a comprehensive family insurance policy covering a 1959 automobile with the Pioneer Mutual Casualty Company (now Personal Service Insurance Co.), appellee herein. The insurance policy provided that appellee would pay all sums which the insureds became legally obligated to pay up to limits of $10,000 for any injury to one person and a maximum of $20,000 for each accident.
Jack Pelfrey was an employee of Olan Mills, Inc., and, as such, was covered under an insurance policy with Home Indemnity Company while driving his own automobile in the scope of his employment.
On January 15, 1969, Albert A. Carter and his spouse, Nora A. Carter, hereinafter appellants, filed suit in the Court of Common Pleas of Clark County against Nancy Pelfrey, administratrix of the estate of Jack Pelfrey, and Olan Mills, Inc., alleging that Jack Pelfrey, while in the scope of his employment, negligently operated his automobile, causing a collision with their car, resulting in injuries to appellants. The accident resulted in the death of Jack Pelfrey, whose estate is insolvent.
Prior to trial, demand was made upon the named defendants up to the policy limits of both insurance companies, in the amount of $48,500 for full settlement of the case. Home Indemnity Company, on behalf of Olan Mills, Inc., made a settlement of $28,500 but allowed appellants to proceed with their case against the estate of Jack Pelfrey.
The matter proceeded to trial against the Pelfrey estate and resulted in a verdict of an aggregate sum of $75,821 in favor of appellants. The $28,500 paid by Home Indemnity on behalf of Olan Mills, Inc., was apportioned against the verdict, and the court entered judgment in favor of appellants for an aggregate sum of $46,321.
Thereafter, appellee paid its $20,000 limit to appellants, leaving the estate of Jack Pelfrey an unsatisfied balance due to appellants of $26,321.
Nancy Pelfrey, administratrix of the Pelfrey estate, assigned any possible cause of action the estate may have against her own insurance company, the appellee, to appellants.
In consideration for this assignment, appellants paid Nancy Pelfrey $1,000 and discharged the Pelfreys from all personal liability to pay the unsatisfied judgments still owing to the appellants.
On April 13, 1972, appellants filed a complaint in the Court of Common Pleas of Cuyahoga County against the appellee, alleging, in essence, that appellee acted in bad faith in conducting the defense of the Pelfreys in the foregoing negligence suit, in violation of its contractual obligation and in disregard of the rights and interests of the Pelfreys. The complaint prays that the Pelfreys be awarded $46,321 and other equitable remedies.
Appellants filed a motion for summary judgment on the issue of liability alone. The court granted the motion, determining that appellee had, as a matter of law, acted in "bad faith" in defending the Pelfreys in their case.
Appellants, as assignees of the estate of Jack Pelfrey in their action for "bad faith," asserted in their complaint that appellee did not act in good faith in defending the estate of Jack Pelfrey because of the following: insurer, who undertook defense of the estate, made no attempt to negotiate a settlement although fully informed about the liability and nature and extent of the injuries; insurer failed to attend and participate in the taking of depositions of seven witnesses; insurer failed to initiate any discovery; insurer failed to offer or agree to pay the face amount of its policy to settle; insurer failed to present any evidence at trial on behalf of the defense; insurer failed to make any effort to pay proceeds of its policy even after adverse judgment had been entered; insurer paid appellants the policy limits only after executions were issued.
The cause went to trial on the sole issue of damages. The court rendered final judgment for the appellants in an aggregate sum of approximately $33,338, as well as $7,800 for attorney fees.
The Court of Appeals reversed the trial court and entered final judgment in favor of appellee on the rationale that an excess judgment may not be recovered by an insolvent estate since an insolvent estate cannot be damaged.
The cause is now before this court pursuant to the allowance of a motion to certify the record.
Mansour, Gavin, Gerlack Manos Co., L.P.A., and Mr. Richard J. McGraw, for appellants.
Mr. William C. Ailes, for appellee.
Appellants, in their sole proposition of law, assert, in essence, that an excess judgment may be recovered from an insurer by an insured's estate or its assignee for "bad faith" despite the insolvency of the estate.
We find merit in this contention.
Traditionally, there have been two schools of thought concerning the imposition of liability upon an insurer for failing to exercise good faith which results in an excess judgment against the insured.
An increasing majority of jurisdictions have adopted the "judgment rule," which advocates the reasoning that an entry of judgment in excess alone is sufficient damage to sustain a recovery from an insurer for its breach of duty to act in good faith in defending the insured's case. Alabama Farm Bureau Mut. Cas. Ins. Co. v. Dalrymple (1959), 270 Ala. 119, 116 So.2d 924; Brown v. Guarantee Ins. Co. (1957), 155 Cal.App.2d 679, 319 P.2d 69; American Fire Cas. Co. v. Davis (Fla.App. 1962), 146 So.2d 615; Wolfberg v. Prudence Mut. Cas. Co. (1968), 98 Ill. App.2d 190, 240 N.E.2d 176; Henke v. Iowa Home Mut. Cas. Co. (1959), 250 Iowa 1123, 97 N.W.2d 168; Jenkins v. General Acci. Fire Life Assur. Corp., Ltd. (1965), 349 Mass. 699, 212 N.E.2d 464; Lange v. Fidelity Cas. Co. (1971), 290 Minn. 61, 185 N.W.2d 881; Dumas v. State Farm Mut. Auto. Ins. Co. (1971), 111 N.H. 43, 274 A.2d 781; Henegan v. Merchants Mut. Ins. Co. (1968), 31 App. Div. 2d 12, 294 N.Y.S. 2d 547; Gray v. Nationwide Mut. Ins. Co. (1966), 422 Pa. 500, 223 A.2d 8; Southern Fire Cas. Co. v. Norris (1952), 35 Tenn. App. 657, 250 S.W.2d 785; Hernandez v. Great American Ins. Co. (Tex. 1971), 464 S.W.2d 91; Ammerman v. Farmers Ins. Exchange (1969), 22 Utah 2d 187, 450 P.2d 460; Harris v. Standard Acci. Ins. Co. (D.C.S.D.N.Y., 1961), 191 F. Supp. 538; Smoot v. State Farm Mut. Auto. Ins. Co. (C.A. 5, 1962), 299 F.2d 525; Anderson v. St. Paul Mercury Indem. Co. (C.A. 7, 1965), 340 F.2d 406; Gaskill v. Preferred Risk Mut. Ins. Co. (D.C. Md. 1966), 251 F. Supp. 66.
Wolfberg, infra, states, at page 196:
"A review of the authorities persuades us to the view that the cases relied on by appellee constitute the earlier and minority view on this issue. These cases were considered in Wooten v. Central Mut. Ins. Co. (La.App. 1966), 182 So.2d 146, which noted that these cases were not persuasive, had been severely criticized, and were expressly refused or failed to be followed in other federal circuits.
"The majority view in this country is represented by Jenkins v. General Acc. Fire Life Assur. Corp., 349 Mass. 699, 212 N.E.2d 464, 465, 467 (Sup.Ct. Mass. 1965), which stated:
"`***Despite some conflict in earlier cases, the weight of authority is that it is not necessary for the insured to allege that he has paid or will pay a judgment in excess of the policy limits in an action against the insurer for breach of its duty to act in good faith***.' (Citing Lee v. Nationwide Mut. Ins. Co., 286 F.2d 295 (4th Cir.); Wessing v. American Indem. Co., D.C., 127 F. Supp. 775; Henke v. IowaHome Mut. Cas. Co., 250 Iowa 1123, 97 N.W.2d 168, and other cases.)"
A living insured with no assets suffers injury when an excess judgment is obtained against him because such a judgment will potentially impair his credit, place a cloud on the title to his exempt estate, impair his ability to successfully apply for loans, diminish his reputation and future prospects and the like. See Crabb v. National Indemnity Co. (S.D. 1973), 205 N.W.2d 633; Anderson v. St. Paul Mercury Indem. Co., supra; and Lange v. Fidelity Casualty Co., supra.
A solvent estate may also pursue an excess judgment against the insurer since the interests of the estate are involved and a full and fair recovery enables the fiduciary of the estate to distribute assets free from the claim of the holder of the excess judgment. Henke v. Iowa Home Mut. Casualty Co., supra; and Wolfberg v. Prudence Mut. Cas. Co., supra.
A decreasing minority of jurisdictions adopt the "payment rule," which advocates the reasoning that, if an insured did not and cannot pay out any money in satisfaction of an excess judgment, the insured was not harmed, and, therefore, the insurer is not to be held responsible for its bad faith in defending the insured's case.
We adopt the rationale of a majority of jurisdictions, which espouse the "judgment rule."
The Court of Appeals for Wood County, in Spitler v. State Auto Mut. (case No. WD 78-27, decided January 26, 1979), also opted for the judgment rule instead of the payment rule. That case was before this court, but the issue presented in the cause sub judice was not raised on appeal. See Spitler v. State Auto Mut. (1980), 61 Ohio St.2d 242.
The seminal case law authority in this area is Wolfberg v. Prudence Mut. Cas. Co., supra ( 98 Ill. App.2d 190). The court in Wolfberg, succinctly gave the rationale for the adoption of the "judgment rule," when it stated, at page 197:
"We are persuaded that the majority view is the sounder one both in justice and logic. The very fact of the entry of judgment itself constitutes damage and harm sufficient to permit recovery. The damage to the estate is the creation of liability for the judgments. The rule of damages is that incurrence is equivalent to outlay.
"***
"Were payment or showing of ability to pay the rule, encouragement would be given to an insurer with an insolvent insured to unreasonably refuse to settle. Such a course would impair the use of insurance for the poor man. Further, the fullness or the emptiness of an insured's purse would be an irrelevant and poor measure of liability and performance of duty by the insurer under his contract."
The Court of Appeals, which adopted the "judgment rule," carved a sole exception to the foregoing principle. The court formulated a hybrid exception to the "judgment rule" which sounds much akin to the rationale of the "payment rule." It reasoned that there is no damage to the insured or his estate either now or in the future, because the estate is insolvent, and, therefore, there is no present or future detriment to the estate. Thus, the court concluded that the insurer, appellee, is relieved from paying the excess judgment even though it has been adjudicated to have acted in bad faith which resulted in the excess judgment rendered against the estate of Jack Pelfrey.
Because of theoretical and practical considerations, we find no reason to carve this exception.
Theoretically, it would be a windfall to the insurer and "such a course would impair the use of insurance for the poor man." See Wolfberg, supra, at page 197.
As to a practical aspect, it is also improper to relieve an insurer from its contractual duty to act in good faith simply because the insured is deceased and insolvent. It is a large assumption that the estate, which at the time of its inventory is insolvent, will remain insolvent. There are numerous instances in which the total net estate may increase and cause an insolvent estate to go through a full administration. For example, the estate of Jack Pelfrey may obtain a solvent status if there are newly discovered assets, such as a lost bank account, unaccounted for real estate in a different jurisdiction or assets such as hidden stock certificates. See R.C. 2109.50. It is also feasible, albeit not common, that the estate of Jack Pelfrey may also inherit money or assets by means of another's will clause granting assets to "Jack Pelfrey or to the estate of Jack Pelfrey." Any one or a series of the foregoing could cause an influx of assets into the estate of Jack Pelfrey raising the insolvent estate to a taxable estate.
The assignment for the action against appellee from the estate of Jack Pelfrey to the appellants also had a value. The appellants paid $1,000 for this assignment. This is but another example of elevating an insolvent estate to a solvent status.
As noted herein, if the estate of Jack Pelfrey were solvent, then it or its assignee could sustain an action against the insurer for 'bad faith." We find no reason to fashion an exception to the judgment rule when an estate is insolvent and yet allow an action of "bad faith" when an estate is solvent, especially in light of the foregoing, which clearly demonstrates that an insolvent estate may easily become solvent, and, therefore, the assets of the estate would be subject to the claims of the holder of the excess judgment.
In Farmers Ins. Exchange v. Schropp (1977), 222 Kan. 612, 567 P.2d 1359, the court, when presented with an identical factual situation as herein, at pages 623-624, stated:
"***The court observed that virtually everything that has been written on this subject in the past fifteen years has favored the judgment rule over the prepayment rule.
"***
"We do not think that the prepayment rule serves the ends of justice, and decline to adopt it. On the contrary, we see no reason why the insolvency of an insured or his estate should excuse the insurer from exercising the same good faith it would be expected to exercise, were the insured fully financially responsible.***" Accord, Sweeten v. National Mut. Ins. Co. (1963), 233 Md. 52, 194 A.2d 817.
Therefore, based upon the foregoing reasons, the judgment of the Court of Appeals is reversed.
Judgment reversed.
W. BROWN, SWEENEY and C. BROWN, JJ., concur.
CELEBREZZE, C.J., P. BROWN and HOLMES, JJ., dissent.