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decided: December 30, 1983.


No. 83 Appeal Docket 1983, Appeal from the Judgment of the Superior Court at No. 1347 October Term, 1981, Reversing the Judgment of the Court of Common Pleas of Philadelphia County at No. 4988 October Term, 1972, Pa. Super. Roberts, C.j., and Nix, Larsen, Flaherty, McDermott, Hutchinson and Zappala, JJ. Flaherty, J., filed a dissenting opinion in which Roberts, C.j., and Hutchinson, J., joined.

Author: Zappala

[ 503 Pa. Page 460]


The issue raised on this appeal is whether a reinsurer may be held liable for a judgment in excess of the policy limits where the original insurer is found to have engaged in a bad faith refusal to settle a claim against its insured.

On July 24, 1972, Durant Reid (Appellant) was injured when his car was struck at an intersection by a car driven by Carrington Ruffin. Ruffin was insured by Granite Mutual Insurance Company under a liability policy in the amount of $10,000. Granite had entered into a contract of reinsurance with Security Mutual Insurance Company (Appellee) for the last $2,500 of this coverage. Ruffin reported the accident to Granite, which in turn reported it to Security. Both insurance companies knew at the outset that Reid had sustained serious and probably permanent injuries to his right hand and arm, and that two witnesses would probably give testimony adverse to the insured driver, Ruffin. Reid initiated a personal injury action against Ruffin, but prior to trial offered to settle the case for the policy amount, $10,000, the offer to expire after thirty days. Granite received the offer but did not respond or inform Security. When no response was received within thirty days, Reid's attorney petitioned to remove the case from Arbitration to Major Case Listing. Thereafter, Granite offered a settlement of $9,000, which was refused. Granite informed Security of the $9,000 offer of settlement and the refusal, of the removal of the case to Major Case Listing, and advised Security to carry a $2,000 reserve (indicating that Granite planned to make a second offer of $9,500).

Granite did make a second settlement offer of $9,500 and it too was refused. Almost three months later, at trial, Granite offered to settle for the policy limit of $10,000. This offer also was rejected, and the case proceeded to trial, where a jury awarded Appellant a verdict of $80,000. In a garnishment proceeding against Granite and Security, Reid charged both insurers with bad faith refusal to settle, and a jury awarded judgment against both insurance companies.

[ 503 Pa. Page 461]

Granite, however, had become insolvent. Security's motion for a new trial was granted and a second jury trial was conducted with Security as the only defendant. Again, a jury verdict was entered against Security for the whole amount of the judgment against Ruffin. The trial court molded this verdict to $96,687.75. Security appealed to the Superior Court, which reversed. Pa. Super. , 460 A.2d 757 (1983). (Opinion by Watkins, J.; Lipez, J., concurring in result; Johnson, J., dissenting).

The Superior Court panel reviewed the applicable law regarding contracts of reinsurance, noting that under such contracts the reinsurer undertakes to protect the original insurer against all or part of a risk which it has undertaken; that the original insured has no interest in the reinsurance; that there is no privity between the original insured and the reinsurer; but that the insured may bring a direct action against the reinsurer where the reinsurance contract may properly be determined to be a third party beneficiary contract or where the reinsurer is a successor which has assumed the original insurer's liability. See Appeal of Goodrich, 109 Pa. 523, 529, 2 A. 209, 211 (1885); 13A Appleman, Insurance Law & Practice § 7681, at 484-85 (1976); 19 Couch on Insurance 80:66, 80:67 at 959 (R.A. Anderson ed., 2d ed. (1959)). The court found that on the facts presented,

Security did not have the right to control the settlement negotiations nor did it participate in same . . . . There was no third party beneficiary contract between the companies, and the reinsuring contract did not create a principal-agent relationship with Granite . . . . An agency relationship was neither contemplated nor intended by the parties.

     and that

Ruffin was not privy to the reinsurance contract nor was he owed any duty by Security as a result of it.

Pa. Super. at , 460 A.2d at 758.

The Superior Court's determination that a principal-agent relationship was not established between Security and

[ 503 Pa. Page 462]

Granite by the reinsurance contract reversed a contrary ruling of law by the trial court. That ruling had been the basis of a special interrogatory submitted to the jury, answered in the affirmative, whether Granite was acting on behalf of Security at the time it engaged in bad faith handling of the claim against its insured.

The Appellant argues here that the Superior Court erred in reversing the trial court's determination that Granite acted as Security's agent. He points to language in the reinsurance contract directing Granite to advise Security of all claims which may result in an excess being charged against Security and to afford Security "the opportunity to be associated with [Granite] in the defense of any claim or suit or proceeding involving this reinsurance," and obliging Granite to "co-operate in every respect in the defense or control of such claim, suit or proceeding." This language, argues Appellant, establishes Security's ultimate control over all claims matters undertaken by Granite. He points further to that section of Article 8 of the contract which dealt specifically with settlement matters as follows:

Settlement of claims involving this reinsurance shall not be made without the consent of the Reinsurer, except in those instances where an immediate decision is necessary and it is impracticable to obtain the consent of the Reinsurer. In such instances, the Company shall exercise the necessary powers in the common interest of itself and the Reinsurer, and the Reinsurer agrees to rely upon the judgment of the Company, it being understood that the Company will forthwith advise the Reinsurer of the action taken.

The Appellant argues that Security's reservation of the power to consent to all settlements involving the reinsurance establishes conclusively that the final decision regarding settlement of claims rested in Security and that Granite acted as an agent on Security's behalf in such matters. We cannot agree.

This Court has defined agency as "the relationship which results from (1) the manifestation of consent of one person

[ 503 Pa. Page 463]

    to another that (2) the other shall act on his behalf and subject to his control, and (3) consent by the other so to act." Smalich v. Westfall, 440 Pa. 409, 413-414, 269 A.2d 476, 480 (1970); See Restatement (Second) of Agency § 1(1) (1958).

Article 8 provides only that settlement shall not be made without Security's consent except where circumstances require an immediate decision by Granite. The Article does not require all decisions regarding settlement matters involving reinsurance to be approved by Security. Security is given no control over decisions by Granite not to settle a claim. Likewise, Security could not direct Granite to accept an offer of settlement if for some reason Granite was unwilling to do so. It is difficult to ...

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