Date: 06-08-2004

Case Style: MARIO BADILLO v. MID CENTURY INSURANCE COMPANY

Case Number: 2004 OK 42

Judge: Winchester

Court: Oklahoma Supreme Court

Plaintiff's Attorney:

Mark E. Bialick, Gerald E. Durbin, II, Rodney D. Stewart, DURBIN, LARIMORE & BIALICK, Oklahoma City, Oklahoma, for appellee/counter appellant.

Defendant's Attorney:

Eric S. Eissenstat, Steve Stephens, Brooks A. Richardson, FELLERS, SNIDER, BLANKENSHIP, BAILEY & TIPPENS, for appellants/counter appellees.

Description:

1 The dispositive issue is whether under the uncontested facts, the trial court should have found as a matter of law that the liability insurer did not violate its duty of good faith and fair dealing to its insured. We hold that the uncontested facts do not support a breach of the duty and therefore the trial court should have granted the appellants' motion for a directed verdict.

I. FACTS

2 On February 4, 2000, Mario Badillo, the appellee/counter appellant, struck a pedestrian, Loretta Smith, in a crosswalk with his vehicle. She sustained severe injuries, resulting in medical expenses in excess of $700,000.00. Mid Century Insurance Company, an appellant/counter appellee, was the liability insurer of Badillo's vehicle.1 The insurance contract carried a policy limit of $10,000.00.

3 Smith's sister employed lawyers on Smith's behalf. The law firm contacted Mid Century's adjuster and at their request, the insurer sent them a check for the policy limits along with a release. They refused to have the release signed without a statement from Badillo. The claims adjuster refused to offer such a statement explaining he must protect his client.

4 Smith's attorney's employed a trial lawyer. He telephoned the claims adjuster and repeated the demand that Badillo be produced for a statement. He added that unless Badillo was produced, he would file a lawsuit and would refuse any subsequent settlement. The adjuster told the trial lawyer that he would check around and get back with him. However, the lawsuit was filed within four hours of the conversation.

5 Mid Century provided independent counsel for Badillo. When the case was tried, the jury found damages in the amount of $1,000,000.00. Badillo was found sixty percent negligent. His portion of the damages was assessed at $600,000.00. With the interest added, the total judgment against him was $633,202.63. No appeal was filed.

6 Smith's trial attorney attempted to collect the judgment against Badillo, although the lawyer knew beforehand that he would not succeed. At a hearing on assets, he formally learned what he already knew; Badillo had few, if any, nonexempt assets to satisfy the judgment and he did not have sufficient income to pay. Smith's trial attorney suggested to Badillo and his attorney that Badillo sue his insurer for bad faith and the judgment against Badillo could be satisfied from that action. In exchange, Smith would suspend her attempts to collect the judgment from Badillo until after the litigation. Filing for bankruptcy was the other alternative offered Badillo.

7 Badillo elected to sue his insurer for bad faith. At the close of the trial, Mid Century and Farmers Insurance Exchange, the appellants, moved for a directed verdict on the claim of bad faith and on the claim for punitive damages. The court denied the first and granted the latter, finding no evidence of reckless disregard or malice by the insurer. The jury then returned a verdict against the appellants for $2,200,000.00, for financial losses, embarrassment, and mental pain and suffering. The trial court entered judgment but refused to award attorney fees or prejudgment interest.2

8 Among other allegations of error, the appellants argue that the trial court should have granted their motion for a directed verdict.

II. STANDARD OF REVIEW

9 The appellants challenge the trial court's refusal to grant their motion for directed verdict on Badillo's claim for bad faith. "Sufficiency of the evidence, the legal standard which determines whether a case may go to the jury . . . is a question of law for the court." Akin v. Missouri Pacific R. Co., 1998 OK 102, 977 P.2d 1040, 1054.

10 In bad faith cases, the appellate court may examine the uncontested facts to determine whether the defendants' actions were reasonable and legitimate. Manis v. Hartford Fire Ins. Co., 1984 OK 25, 12, 681 P.2d 760, 762. In Manis the insured sued the insurer for bad faith when it denied the insured's claim for a fire loss. The jury awarded the plaintiff his damages under the contract as well as punitive damages for bad faith. On appeal, this Court observed that evidence existed showing the fire was not accidental, but incendiary in origin, and the Court held that the insurer's conduct was reasonable. Therefore, the Court reversed the punitive damages for bad faith. Manis, 1984 OK 25, 15, 681 P.2d at 762.

11 Manis quoted Christian v. American Home Assurance Co., 1977 OK 141, 577 P.2d 899, and McCorkle v. Great Atlantic Ins. Co., 1981 OK 128, 637 P.2d 583, that an insurer did not litigate at its peril, and that there could be disagreement between insurer and insured on a variety of matters such as insurable interest, extent of coverage, cause of loss, amount of loss, or breach of policy conditions. Manis, 1984 OK 25, 5-7, 681 P.2d at 761.

12 Christian, McCorkle and Manis all involved losses suffered by the insured, which the insured tried to collect from the insurer. The case at bar involves a third party who was injured. But this principle still applies, that the appellate court may examine the jury's verdict and if it finds that the facts reveal the decision of the insurer leading to the litigation was reasonable, it will reverse the jury verdict on that issue. Consistent with the law of appellate review, those facts must be uncontested.

III. USE OF "UNREASONABLE" IN THE INTENTIONAL TORT OF BAD FAITH

13 The appellants argue that the trial court erred in denying their motion for directed verdict because the evidence presented at trial was insufficient to support a permissible inference that they acted unreasonably or in bad faith. Badillo answers that the trial court properly submitted the issue of bad faith to the jury. He asserts that the essence of bad faith is reasonableness, and that if the insurance company is not reasonable in the manner it treats its insured, bad faith exists. He insists that the cases cited by the appellants to support their position that they did not violate their duty of good faith and fair dealing pre-date today's reasonableness standard. Badillo concludes that where there is conflicting evidence concerning the reasonableness of the insurer's conduct, the issue of bad faith must be decided by the jury.

14 The objections of the appellants and the answer of Badillo indicate confusion over what actions of an insurer comprise bad faith. The trial court used Oklahoma Uniform Jury Instruction (OUJI) number 22.3 as its Jury Instruction No. 13. The appellants had previously objected to its use and offered a modified version of the OUJI. They preserved their objection in the Petition in Error, and argued in their Brief in Chief that the trial court erred in refusing to give their proposed instruction. A finding of error in denying a motion for a directed verdict precedes the jury instruction stage of a trial. Nevertheless, a review of the elements of bad faith listed in OUJI is necessary for clarification and for a correct understanding of the law.

15 The OUJI 22.3 seems to imply three elements in the bad faith determination. If we assume that the plaintiff was covered under the insurer's liability policy, and the insurer was required to defend in the previous lawsuit, then a jury must determine that (1) the insurer's action was unreasonable under the circumstances; (2) that the insurer did not deal fairly and in good faith with the plaintiff; and (3) that the violation of its duty of good faith and fair dealing was the direct cause of the injury sustained by the plaintiff.

16 Instructing that to prove bad faith you must show that the insurer failed to deal fairly, in good faith, does not provide any help in understanding the term. The only help provided by the instruction is whether the actions of the insured were unreasonable under the circumstances. But the problem with the use of the term "unreasonable" is that it sounds like a description of negligence, instead of bad faith.

17 Manis characterizes this tort as "the intentional tort of bad faith." Manis, 1984 OK 25, 6, 681 P.2d at 761. McCorkle also refers to the tort as "the intentional tort of bad-faith recognized in Christian." McCorkle, 1981 OK 128, 9, 637 P.2d at 585. In contrast, negligence is not an intentional tort.

18 Christian approved and adopted the rule in Gruenberg that "an insurer has an implied duty to deal fairly and act in good faith with its insured and that the violation of this duty gives rise to an action in tort for which consequential and, in a proper case, punitive, damages may be sought." Christian, 1977 OK 141, 25, 577 P.2d at 905, citing Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 510 P.2d 1032 (1973). The Ninth Circuit construing California law, observed: "In California, mere negligence is not enough to constitute unreasonable behavior for the purpose of establishing a breach of the implied covenant of good faith and fair dealing in an insurance case." Aceves v. Allstate Ins. Co., 68 F.3d 1160, 1166 (9th Cir. 1995). When the term "unreasonable conduct is used in connection with this intentional tort, it means something more than the use of the reasonable person standard, which is an element of negligence.3

19 In 1935, Oklahoma rejected ordinary care, the standard in negligence cases, when determining a standard for bad faith. Boling v. New Amsterdam Cas. Co., 1935 OK 587, 46 P.2d 916. The Court observed that some cases from other jurisdictions permitted recovery upon proof the insurer was negligent in refusing to settle a claim for damages covered by the policy; but the prevailing rule required good faith on the part of the insurer toward the insured. The Court continued, "The action at bar is predicated on bad faith, which is a thing apart from self-interest and renders unnecessary consideration of the cases based on negligence." Boling, 1935 OK 587, 11-12, 46 P.2d at 917-918.

20 The Restatement (Second) of Torts § 870 (1979) in Comment (b) provides a definition for an intentional tort:

"An intentional tort is one in which the actor intends to produce the harm that ensues; it is not enough that he intends to perform the act. He intends to produce the harm when he desires to bring about the consequence by performing the act. As indicated in § 8A, he also is treated as intending that consequence if he knows or believes that the consequence is certain, or substantially certain, to result from his act."

The probability of the consequence of an act causing harm involves a linear progression of culpability: as the actor's conduct loses the character of intent, it becomes mere recklessness, and when the intent amounts only to a risk that the result will follow, it becomes ordinary negligence.

21 Pursuant to the description of an intentional tort in the Restatement (Second) of Torts, if the tort of bad faith is an intentional tort in Oklahoma, and not mere negligence, the intent behind an insurer's action must be more than a mere risk that the insured will lose the benefit of the policy; the action must be motivated by an intent to deprive the insured of the benefit.

22 The Restatement (Second) of Contracts § 205 agrees with Oklahoma's case law that "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." Comment (a) observes that the phrase "good faith" is used in a variety of contexts, and its meaning varies somewhat with the context. Then it describes the character of good faith:

"Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving 'bad faith' because they violate community standards of decency, fairness or reasonableness."

These quotations give a context to the use of the term "reasonableness" when used with regard to the intentional tort of bad faith. Bad faith must be the opposite of the good faith description. Therefore, bad faith performance includes the intent by the insurer to act in a manner inconsistent with the justified expectations of the insured, that is, the insurer intends to act unfairly or unreasonably.

23 The "ordinary care" exercised by a "reasonably careful person" used in negligence law is not the same thing as the unreasonable actions of an insurer in the intentional tort of bad faith.

IV. DESCRIPTION OF THE INTENTIONAL TORT OF BAD FAITH

24 The issue in this case rests upon an assumption that a refusal to produce Badillo for a pretrial statement was unreasonable to the degree that it constituted a breach of the duty of good faith and fair dealing. Because Smith's trial lawyer refused to consider settlement after the lawsuit was filed, the appellants' pretrial actions must be examined in determining bad faith.

25 Smith's attorneys injected the issue of drinking and driving into the settlement negotiations. When they did this, knowing their client was in a coma at the time, they injected an issue involving criminal conduct, where an admission carries a danger of criminal penalties. A refusal by an insurer to produce an insured under such circumstances may be prudent, but even if it were not prudent, such a refusal does not rise to the level of bad faith.

26 As noted above, the Christian case cited the California case of Gruenberg as persuasive in its analysis of the insurer's duty of good faith and fair dealing. Both Christian and Gruenberg involved first party disputes; the insured was suing the insurer because the insurer refused to pay the insured's own loss. In Gruenberg the insured brought an action against the insurers when they denied payment on a fire policy. The insured alleged that the insurance companies entered into a scheme to deprive the insured of the benefits of his policies by encouraging that criminal charges be brought against the insured. When the charges were brought, the insurance companies insisted that the insured appear for a statement concerning their investigation in compliance with the cooperation provisions of the insurance policy. The insured's attorney told the insurers that he had advised his client not to make any statements concerning the fire loss while criminal charges were pending. The insurers then denied liability on the policies because of the insured's failure to appear for a statement.

27 After the criminal charges were dismissed for lack of probable cause, the insured's attorney advised the insurers that the insured was now prepared to submit himself for an examination, but the insurers maintained their position denying payment under the policies. When the insured sued, the trial court dismissed based on the defendants' demurrers and the plaintiff's refusal to amend. The Supreme Court of California reversed and remanded with directions to overrule the demurrers and allow the defendants to answer. Gruenberg, 9 Cal.3d at 490, 510 P.2d at 1043.

28 The Gruenberg court held that the insured had stated a cause of action in his allegation that the insurers had placed him in an impossible position for the purpose of denying his claim. After they accused the insured of a crime, they denied his claims because his attorney refused to produce him for a statement required by the insurance contract and by California's statutes.

29 In the case at bar, it was not Farmers who placed Badillo in the position of possibly incriminating himself. It was Smith's attorneys. Then when Farmers determined not to produce him, Smith's attorneys succeeded in the negligence lawsuit, which subsequently forced Badillo into a lawsuit against his own insurer so Smith could collect her judgment against Badillo. If the refusal of Gruenberg's attorney to present him was justified by the facts of that case, certainly Farmers' reluctance to present Badillo is reasonable and no violation of the intentional tort of bad faith.

30 Black's Law Dictionary (7th Ed. 1999) defines bad faith in relation to insurance as follows:

"An insurance company's unreasonable and unfounded (though not necessarily fraudulent) refusal to provide coverage in violation of the duties of good faith and fair dealing owed to an insured. Bad faith often involves an insurer's failure to pay the insured's claim or a claim brought by a third party. . . . An insured's claim against an insurance company for an unreasonable and unfounded refusal to provide coverage."

This definition emphasizes the conduct involved is "unreasonable and unfounded."

31 Oklahoma statutory law describes the duty of good faith in 25 O.S.2001, § 9: "Good faith consists in an honest intention to abstain from taking any unconscientious advantage of another, even through the forms or technicalities of law, together with an absence of all information or belief of facts which would render the transaction unconscientious. (Emphasis Added by MoreLaw). " Two important concepts may be taken from this definition: (1) an insurer's intentions must be honest, and (2) the insurer cannot take unconscientious advantage of the insured. These terms are consistent with Black's definition of bad faith as conduct that is unreasonable and unfounded. A fair conclusion from these two definitions is that bad faith does not involve merely negligent behavior. And it is certainly not strict liability, where an insurer must get a good result for the insured or face paying beyond the insurance policy limits. If a case is allowed to go to a jury, there must be some evidence of dishonest intentions, unconscientious advantage, or action taken that is unreasonable and unfounded. These elements are consistent with our case law.

32 The duty of good faith and fair dealing in insurance law was established early in this State's history. In Boling, which was discussed above, the facts reveal that the insured received a judgment against her in a wrongful death lawsuit in the amount of $20,000.00. The plaintiff extended a post-judgment offer to settle the case for $6,000.00. The insured's policy limits were $5,000.00. The insurer, New Amsterdam Casualty Company, refused to allow the settlement unless the insured paid $4,500.00 of the $6,000.00. The insurer determined there was no reasonable prospect of reversing the judgment on appeal, and so it did not appeal. The insured decided to appeal without the aid of the insurer and became liable to the plaintiff for $17,000.00. The insured sued the insurer for bad faith, and then appealed a judgment in favor of the insurer.

33 This Court reversed and remanded. The Court observed that an insurer, under certain circumstances, may become liable for an entire judgment recovered against an insured, even though it exceeds the amount of liability named in the policy. Boling, 1935 OK 587, 11, 46 P.2d at 917. It held that an insurer "must act honestly to effectually indemnify and save the insured harmless as it has contracted to do - to the extent, if necessary, that it must make whatever payment and settlement an honest judgment and discretion dictate, within the limits of the policy. . . ." A failure to so act constitutes bad faith. Boling, 1935 OK 587, 20, 46 P.2d at 919. As discussed earlier, the Court also considered whether negligence or bad faith should be the basis for recovery, and rejected negligence. Boling, 1935 OK 587, 11-12, 46 P.2d at 917-918. We conclude from Boling that bad faith must involve dishonest intentions, unconscientious advantage, or action taken that is unreasonable and unfounded.

34 In another early case, National Mut. Cas. Co. v. Britt, 1948 OK 256, 200 P.2d 407,4 the insureds sued the insurer for bad faith alleging that the insurer refused to accept offers of compromise and settlement for an amount less than the policy limit, $5,000.00. The facts revealed that the plaintiff in the first lawsuit had offered to settle with the insured for $3,900.00. The insurer rejected the offer. On the morning of trial, the insurer rejected an offer to settle for $4,900.00. The insureds received a judgment against them for $10,000.00. In their bad faith action, the insureds prevailed and were awarded a judgment against the insurer in the amount of $5,000.00. When the insurer appealed, this Court affirmed the judgment. The Court observed that the insurer was bound to give the rights of the insureds at least as much consideration as it did its own in determining whether or not to effect a settlement. Britt, 1948 OK 256, 18, 200 P.2d at 411. The Court observed that the insurer did not have to accept an offer of settlement every time there was a possibility a verdict against the insured would exceed the policy limits, but if the insurer refused a settlement, based on a mere chance that the third party claim would be defeated, then such a refusal would not be good faith. Britt, 1948 OK 256, 23, 200 P.2d at 412.

35 The Court concluded that when viewed in a light most favorable to the insureds, the insurer knew it had no more than an equal chance of success in wholly defeating the underlying action, and that there was no chance of a verdict within the policy limits. Britt, 1948 OK 256, 27, 200 P.2d at 412. The Court approved an instruction given to the jury that if the insurer "was guilty of bad faith and acted in a reckless disregard of the [insureds'] rights in refusing to settle the case for less than the policy limits, the [insureds] could recover." Britt, 1948 OK 256, 39, 200 P.2d at 413. To further explain the tort, the Court referred to cases using the phrases, "recklessly and contumaciously refuse to settle" and "arbitrary refusal to settle." Britt, 1948 OK 256, 41and 42, 200 P.2d at 413. Britt also is consistent with our conclusion that bad faith must involve dishonest intentions, unconscientious advantage, or action taken that is unreasonable and unfounded.

36 To violate the contractual duty of good faith and fair dealing, an insurer must have the intent to deprive the insured of the benefit of the contract of insurance. That act must involve dishonest intentions, taking unconscientious advantage to that degree that the act becomes unreasonable. That act, as a matter of causation, must result in the loss to the insured. An insurer cannot be held to the standard of guaranteeing that it will make no mistake in crafting a settlement with an injured third party, nor is it required to guarantee that it will reach the lowest settlement possible, nor is the insurer responsible if the third party decides to sue in spite of the insurer's efforts.

VI. CONCLUSION

37 The appellants, in representing their insured, offered Smith's attorneys the policy limits on behalf of Badillo, and did so in a timely manner. The appellants made the decision not to present Badillo for a statement only after Smith's attorneys expressed their intent to question him about drinking and driving, a criminal offense. No Oklahoma case holds that an insurer that offers policy limits in a timely fashion has committed bad faith for making a decision that is legitimately a matter of discretion. Where this Court has affirmed a judgment against an insurer for bad faith, the insurer acted in its own interest, and to the detriment of the insured. In the case at bar there is no evidence that the insurer gained any advantage in refusing to produce Badillo for a statement.

38 Georgia Cas. Co. v. Mann¸ 242 Ky. 447, 46 S.W.2d 777, 779, 780 (1932) makes the following observation, which is also pertinent to the case at bar:

"[L]et us suppose that in this very case the insurance company had authorized its local counsel to defend or settle. Would it be contended for a moment that, although he exercised an honest judgment after ascertaining the facts, the company could recover of him the excess over what the case could have been compromised for on the ground that he failed to make the right choice? Clearly not. The gift of prophecy has never been bestowed on ordinary mortals, and as yet their vision has not reached such a state of perfection that they have the power to predict what will be the verdict of the jury on disputed facts in a personal injury case. . . . [T]he evidence on the question of liability was conflicting, and the most that can be said is that, in refusing to settle, the insurance company committed a mere error of judgment for which it cannot be held liable."

39 In the case at bar, it cannot even be said that the insurer refused to settle; it simply did not offer up their insured for a statement soon enough to suit the plaintiff. The motion for a directed verdict should have been granted. The judgment is reversed and remanded to the trial court with directions to grant appellants' motion for a directed verdict.

Outcome: Reversed and remanded

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: Supreme Court Docket Entries