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McNally v. Nationwide Insurance Co.

filed: March 20, 1987; As Amended, April 23, 1987.


On Appeal from the United States District Court for the District of Delaware, D.C. Civil No. 83-0865.

Author: Becker

Before: BECKER, MANSMANN, Circuit Judges and TEITELBAUM, District Judge.*fn*

BECKER, Circuit Judge:

This appeal arises out of a lawsuit by John K. McNally, Jr., against his insurer, Nationwide Insurance Company, McNally contends that Nationwide failed in bad faith to settle a claim brought against him by Richard L. and Sheila M. Eckman for catastrophic injuries caused by McNally's negligence. Jurisdiction was founded upon diversity of citizenship, 28 U.S.C. § 1332. A jury in the district court for the District of Delaware found that Nationwide acted unreasonably in refusing either to accept the settlement offer the Eckmans made to Nationwide or to interplead its policy. Nationwide appeals, raising a wide variety of issues. We affirm in all respects.

I. Facts and Procedural History

On November 9, 1980, McNally, who was driving while intoxicated, ran a stop sign in New Castle County, Delaware, and proceeded into an intersection travelling approximately 12 miles per hour above the speed limit. There he collided with an airport limousine drive by Paul J. McKelvey, an employee of the limousine's owner, Henry R. Kesterson, who was insured by CNA Insurance. McKelvey was driving approximately 10 miles per hour above the speed limit. Sgt. Eckman, a passenger in the limousine, was very seriously and permanently injured;*fn1 his wife, also a passenger, suffered relatively minor injuries. A number of other people were injured in other ways, some very seriously, some less so.*fn2

To make whole the victims of this accident McNally has essentially no assets other than his insurance policy with defendant Nationwide, which provided a total of $300,000 coverage, with a $100,000 limit on recovery for any single victim. The record does not reflect whether or not Kesterson is similarly without assets, though we do know of his policy with CNA, which provides a total of $500,000 coverage, with a $100,000 per person limit. Because McNally does not have enough assets to compensate the Eckmans for the injuries he has caused them -- and the same appears to be the case for Kesterson, although the record is not clear on this point -- it appears that any recovery by the Eckmans in excess of $400,000 ($100,000 from each insurance company for Mr. and Mrs. Eckman respectively)*fn3 could actually be collected only if the money came ultimately from the insurance companies, which of course have deep enough pockets to satisfy any judgment that might be awarded as a result of this accident.

The litigation strategy leading to this appeal is as follows. On September 18, 1981, nine months after the accident, the Eckmans' lawyer, F. Alton Tybout, wrote to Nationwide and CNA, offering to settle the Eckmans' claims if the insurers would each pay the Eckmans $100,000 by October 30, 1981.*fn4 Morton Kimmel, counsel to Nationwide in this matter, believed that Sgt. Eckman's injuries were catastrophic and could result in a huge verdict against McNally. When he received Tybout's demand letter Kimmel sent the Nationwide supervisors a memo urging them either to accept this offer or to interplead the amount of its policy with McNally into court, so that the court could then divide the funds among McNally's victims. 124E-125E. Although the matter was discussed at a conference at Nationwide's regional office, Nationwide declined to do either, and allowed the deadline on the Eckmans' settlement offer to pass.

After the settlement offer was declined the Eckmans sued McNally and Kesterson in Delaware Superior court, where a jury awarded them a total of $3.15 million. The jury also decided that McNally was 65% responsible, and Kesterson 35% responsible, for the Eckmans' injuries. See McNally v. Eckman, 466 A.2d 363, 366 (Del. Sup. 1983). The Eckmans then agreed with defendants McNally and Kesterson that, if the defendants would sue their insurers for bad faith refusal to settle, and would turn over to the Eckmans any money won in such suits, the Eckmans would not proceed against McNally or Kesterson. This case is the bad faith failure to settle action which McNally, pursuant to that agreement, brought against his insurer, Nationwide.*fn5

Tybout has represented McNally throughout this litigation except at trial.*fn6 His theory of the case has been that Nationwide was attempting to save money by settling below policy limits, and even if that was impossible, by delaying settlement so as to keep the amount of its policy with McNally in its own coffers for as long as it could. Tybout submits that Nationwide's course of conduct was irresponsible because, when aggregated, the injuries were worth vastly more than McNally policy's limits ($300,000). It was to achieve these ends. Tybout hoped to persuade the jury, that Nationwide rejected the Eckmans' settlement offer and refused to interplead the McNally's policy limits in October, 1981.

At trial, both parties called expert witnesses to give their opinion on whether Nationwide acted unreasonably or in bad faith by failing to settle or interplead by the October 31, 1981 deadline. McNally's expert, John E. Sandbower, III, testified that Nationwide could respond reasonably to the October 31, 1981, settlement offer only by either accepting the offer or by interpleading at that time. 1605A-1612A. Nationwide's expert, Edmund N. Carpenter, II, opined that "Nationwide and its attorneys did not act in bad faith or negligently or fail to perform their duty to McNally in deferring and thus rejecting acceptance of the settlement proposal of the Eckmans, . . . [or] in deferring the filing of the interpleader action." Opinion of Edmund N. Carpenter, II, at 844E.

Following a four week trial week trial, and pursuant to special interrogatories,*fn7 the jury found that Nationwide acted unreasonably by failing either to interplead or accept the Eckmans' settlement offer. The jury found Nationwide acted unreasonably by failing either to interplead or accept the Eckmans' settlement offer. The jury found that this failure was the proximate cause of McNally's current indebtedness to the Eckmans. The parties have stipulated that the damages against McNally in the state court action ($3.15 million), plus any interest accrued thereon since the day of entry of judgment in that action.

II. The Law of Bad Faith Refusal to Settle And Nationwide's Contentions on this Appeal

The parties agree that Delaware law applies to this case. That law provides that, in a lawsuit between the insured and the alleged victim of plaintiff's conduct, the

liability of an insurance carrier to its policyholder in excess of policy limits is based on the tortious conduct of the insurance carrier, which under the policy has sole control of the defense.

Stilwell v. Parsons, 51 Del. 342, 145 A.2d 397, 402 (Del. 1958). The insurer is liable if it "fail[ed] to use good faith or due care in settlement negotiations with plaintiff prior to trial." Id. When a judgment in excess of the policy limits might be obtained by the claimant, the good faith standard is satisfied only if the insurer acts in the same way as would a "reasonable and prudent man with the obligation to pay all of the recoverable damages." 7C John Allen Appleman, Insurance Law and Practice § 4711 at 395 (Berdal ed. 1979). The reasonable insurer standard must be applied on the basis of what such a hypothetical actor would do "in the light of the insurer's expertise in the field." Id. at 396. After instructing the jury on this law, the district court ordered the jury to give its decision by responding to three special interrogatories. The first of these is relevant for present purposes, and is set out in the margin.*fn8

INSTRUCTION: If you answer Question 1(a) with a "No," you need not answer question 1(b).

1. Has McNally proved by a preponderance of the evidence:

(a) that Nationwide breached its duty of reasonable care (as explained in the Court's instructions) by neither accepting the Eckmans' settlement offer nor interpleading on or before October 30, 1981?

Yes No

[checked yes]

and (b) that if Nationwide had followed one of these courses the Eckmans' judgment against McNally would not have been entered?

Yes No

[checked yes]

The second interrogatory presented an alternative theory of liability to the jury. If, even given the information it had on October 31, 1981, Nationwide acted reasonably in failing to settle or interplead, interrogatory #2 asked the jury whether Nationwide nevertheless breached its duty to McNally by obtaining too little information about the claim, so that the insurer was still responsible for failing to resolve the Eckman claim by the settlement offer's deadline. The jury concluded that Nationwide had so breached its duty. In its answer to interrogatories #1 and #2, the jury thus determined that in light of the information Nationwide had (interrogatory #1) and would have had if it had investigated properly (interrogatory #2), a reasonable insurer would have either settled or interpled in response to the Eckman offer. Whether or not McNally is correct that interrogatory #2 can constitute a separate ground for affirmance independent of interrogatory #1, we are compelled to address the contention Nationwide advances in this Court, that a duty to settle or interplead could never be imposed upon an insurer which knew what Nationwide knew in this case.

Nationwide has offered a convincing argument that, by the arguments he made in the district court, McNally waived reliance on the jury's decision in interrogatory #2. McNally denies having waived the argument. In view of the proceeding comments we need not resolve the waiver issue.

The third interrogatory asked the jury to determine whether McNally had consumed the illegal drug psilocybin prior to the accident, and failed to inform Nationwide of this fact. (Nationwide had argued that McNally had both consumed the drug and intentionally failed to disclose the fact, and that this constituted a failure on McNally's part to cooperate with his insurer; such a failure, Nationwide further argued, would be a complete defense to the breach of duty with which McNally had charged Nationwide.) The jury found that McNally had not consumed the drug. Nationwide does not make any sustained or credible attack on this decision by the jury.

Nationwide challenges the finding of liability on several grounds. First, in a variety of ways Nationwide argues that the Eckmans' settlement offer was not a firm and unconditional offer to settle their case and therefore that, as a matter of law, Nationwide's rejection of that offer cannot be the basis of bad faith failure to settle claim. Second, Nationwide argues that the jury verdict was based upon an improper theory of a duty to interplead. Third, Nationwide contends that, because the offer required action by both Nationwide and CNA, because CNA did not accept the offer, Nationwide's failure to accept it cannot be the proximate cause of the offer's rejection. Fourth, Nationwide argues that McNally consented to Nationwide's rejection of the Eckmans' offer at the time of the rejection, or ratified that decision afterwards, so that he cannot now challenge the rejection as unreasonable. If we accepted any of these arguments, we would have to reverse. Nationwide also asserts a variety of errors, relating largely to the jury instructions, which it claims require a new trial. For the reasons that follow we reject all of these contentions.

Finally, there is an issue as to the appropriate rate of post-judgment interest at which to calculate the damages McNally incurred as the defendant in the Delaware state lawsuit. The district court, applying Del. Code 6 § 2301 (1980), utilized a fixed rate of interest of 17% instead of one which fluctuated from the date of judgment to the date of payment. Although the point is a close one, we conclude that the district court was correct on ...

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