Circuit Court for Baltimore City

Case # 94-224008

No. 52

September Term, 2000

__________________________________

RICHARD M. KREMEN, TRUSTEE

 

v.

MARYLAND AUTOMOBILE

INSURANCE FUND

__________________________________

Bell, C.J.

Eldridge

Raker

Wilner

Cathell

Harrell

Rodowsky, Lawrence F.

(retired, specially assigned),

JJ.

__________________________________

Opinion by Harrell, J.

__________________________________

Filed: April 13, 2001

On 7 November 1989, an automobile accident occurred in Anne Arundel County involving Gary Jones and David Boyce. At the time of the accident, Jones carried an automobile insurance policy with a $20,000 policy limit per individual. Boyce had a policy with underinsured driver coverage and a $50,000 policy limit. Boyce filed a motor tort lawsuit against Jones in the Circuit Court for Anne Arundel County seeking damages for personal injuries. Boyce offered pre-trial to settle his claim for Jones’s $20,000 policy limit, but Jones’s insurer, the Maryland Automobile Insurance Fund (Appellee or MAIF), refused the settlement offer. A jury trial resulted in a judgment for $82,882 in Boyce’s (and his wife's) favor. MAIF paid to Boyce its $20,000 policy limit. Boyce’s insurer paid him $30,000, being the difference between MAIF’s payment and Boyce’s underinsured motorist coverage.

Jones thereafter filed for bankruptcy. His trustee-in-bankruptcy, Richard M. Kremen (Appellant or Kremen), sued MAIF in the Circuit Court for Baltimore City for bad faith refusal to settle Boyce’s motor tort claim for Jones’s policy limits. A jury found in favor of Kremen, and the trial judge, declining to apply the collateral source rule to exclude from consideration the monies paid by Boyce’s insurer to Boyce, awarded the bankruptcy estate $32,882, plus interest at the rate of 10 percent per annum from the date of the judgment in the motor tort case. Both parties appealed to the Court of Special Appeals.

On 23 July 2000, we, on our own motion, issued a writ of certiorari to the Court of Special Appeals prior to that court’s consideration of the case. Kremen v. MAIF, 359 Md. 668, 755 A.2d 1139 (2000). Appellant presents the following issue:

Did the trial court err by failing to apply the collateral source rule in this case and in giving MAIF credit for the monies paid by the injured party’s underinsured motorist insurance carrier?

 

In its cross-appeal, Appellee presents the following two issues:

Can the Trustee [Appellant] succeed in a bad faith refusal to settle a claim case when both MAIF and the Trustee’s predecessor-in-interest [Jones] agreed the case should not be settled, and when there was no unconditional settlement offered?

 

Was the trial judge correct in limiting damages in the bad faith case to the amount of money, plus interest, that Jones would have had to pay to satisfy the judgment entered against him in 1993?

On 7 November 1989, Gary Jones, while operating an automobile in Anne Arundel County, failed to yield the right of way, causing his vehicle to collide with David Boyce’s Ford Aerostar van. At the time of the collision, Jones carried automobile-bodily injury liability insurance, providing a maximum coverage of $20,000 per injured individual, issued by MAIF. Boyce had an automobile liability policy, with uninsured motorist coverage and a $50,000 limit, with Harleysville Insurance Company (HIC). Boyce and his wife ("Boyce" has been used in the opinion occasionally to refer, as appropriate to the context, to either Mr. Boyce individually or Mr. and Mrs. Boyce) sued Jones in the Circuit Court for Anne Arundel County seeking compensation for personal injuries.

Boyce, through his attorney, offered to settle the case for Jones’s $20,000 policy limit, Apparently experiencing some lack of cooperation from Jones regarding discovery matters, Boyce’s attorney wrote Jones’s attorney again on 21 January 1993. After complaining about untimely and inadequate interrogatory responses, this letter stated, in pertinent part:

I put you and the liability carrier [MAIF] on notice that I need your policy limits offer so that I can invite the UM carrier [Harleysville] to intervene. If we wait too long, the UM carrier will be able to get out of this matter due to lack of timely notice. This will expose your client to the entire verdict and any contributions from Harleysville. Before Harleysville will even talk to me, I need to have the policy limits offer from your client’s insured. It is my understanding that it is a low limit policy, but I have never had written verification of that. Until I have written verification that there is a minimum policy limit and the offer of that amount, I cannot attempt to perfect my claim against the UM carrier. If I cannot perfect my claim against the UM carrier, it is only reasonable and just that MAIF pay the entire amount of the verdict either on bad faith or because of prejudice to the UM process.

* * *

I have counseled with my client and we have changed our standard letter [the 30 December 1991 demand letter] to advise you that the offer of settlement would automatically lapse sixty days prior to trial instead of fifteen. but the offer was declined. According to MAIF, Jones agreed with MAIF that Boyce’s claim should not be settled for the policy limit. The attorney MAIF engaged to defend Jones in the underlying motor tort case made these assertions while testifying in the Circuit Court for Baltimore City during the trial of the bad faith refusal to settle claim. We note that Appellant’s attorney objected to these characterizations of Jones’s mental state. The trial judge’s response to the first objection, directed to the witness, was "[j]ust answer the questions. Don’t give us your opinion as to the people’s mood, et cetera." In response to the second objection, the judge instructed the witness, "[a]ll right. Stop. That’s enough . . . ." Appellant does not press any arguments in this appeal about the effect to be given the court’s apparent "rulings" in this regard. MAIF argued that Boyce was demanding the $20,000 policy limit from MAIF while, at the same time, attempting to collect $50,000 under the underinsured motorist provision of his HIC policy. MAIF suggested that HIC "wanted to be sure that their [sic] subrogation rights had not been prejudiced by Mr. Boyce because they intended to go after Mr. Jones for any monies they paid out over our policy limits." Following a jury trial held on 20 May 1993 in the Circuit Court, Boyce was awarded $70,303 for his injuries, and $12,579 was awarded to Boyce and his wife for loss of consortium, for a total award of $82,882. MAIF paid its $20,000 policy limit to Boyce. HIC paid him $30,000, the difference between Boyce’s $50,000 uninsured motorist coverage and the $20,000 paid by MAIF.

Jones filed for bankruptcy. Richard M. Kremen (Appellant) was named the trustee of the bankruptcy estate. On 4 March 1994, Boyce, through counsel, objected to the discharge of his judgment against Jones in the motor tort case (Adversary No. 95-5074-JFS) (the "adversarial proceeding"). On 16 March 1994, Bankruptcy Judge James F. Schneider entered a "Discharge of Debtor" order in the bankruptcy case, which discharged all of Jones’s dischargeable debts, except the Boyce judgment, for which, see infra, all collateral activity was stayed pending the outcome of the adversarial proceeding.

According to the docket, on 10 May 1994, Judge Schneider granted Kremen’s application to employ counsel for the bankruptcy estate to pursue the bad faith refusal to settle action against MAIF. Following a 13 June 1994 hearing on Boyce's claim, Judge Schneider ordered that final disposition of the Boyce complaint be stayed pending the resolution of Kremen’s action against MAIF. Ten days after entering the stay order, Judge Schneider also granted Kremen’s application to employ the same attorney who represented Boyce in the adversarial proceeding (but who had not represented him in the motor vehicle tort case) as special counsel to pursue the claim against MAIF. Another order, entered on 24 November 1999 by Judge Schneider, denied a contemplated dismissal of the Boyce claim in favor of continuing to stay the adversarial proceeding pending the resolution of the litigation that is now before this Court.

From the foregoing, we glean that: (1) Jones’s bankruptcy filing was instigated by the outstanding judgment, a view espoused by one of Appellant’s witnesses at the trial of the bad faith claim; (2) the Boyce judgment against Jones was not discharged by the 16 March 1994 order; (3) Boyce's adversarial proceeding to determine whether the judgment against Jones should be excepted from discharge has been stayed pending the outcome of the present action; and, (4) any amount recovered from the pursuit of the bad faith claim against MAIF, after payment of special counsel’s fee, is destined for application by the bankruptcy estate to Boyce's outstanding judgment against the debtor, Jones. Thus, a substantial likelihood exists that, whatever the outcome of the present litigation, Jones will not realize any cash in hand; only Boyce may. Appellant filed suit on 12 August 1994 against MAIF in the Circuit Court for Baltimore City alleging that MAIF violated its duty to attempt to settle the underlying motor tort case in good faith before trial for Jones’s policy limits. Among other things, MAIF, relying on the testimony of the attorney it had engaged to defend Jones in the motor tort claim, argued that Jones had agreed with MAIF to decline the offer to settle with Boyce because of the twin concerns that Boyce was inflating his injuries and possible exposure to a subrogation claim from HIC. Although the record reflects that HIC made preparatory requests of Boyce for information and documentation to protect its right to seek subrogation from Jones if it ultimately paid benefits to Boyce under the underinsured motorist coverage, there is no documentary evidence corroborating the testimony at the bad faith refusal to settle trial of Jones’s attorney in the motor tort case or the corporate designee of MAIF that the potentiality of a subrogation claim against Jones played any role in MAIF’s calculus leading to rejection of the $20,000 settlement offer. On this point, MAIF’s corporate designee, Mr. Sindler, and Appellant agreed. Moreover, it is pellucid on this record that HIC never asserted a subrogation claim against Jones as to the $30,000 it paid to the Boyces. Limitations on the assertion of such a claim have expired.

(quoting State Farm v. Ins. Comm’r, 283 Md. 663, 675, 392 A.2d 1114, 1120 (1978)). Md. Code (1974, 1997 Repl. Vol.), § 19-513(b) of the Insurance Article states:

(b) Duplicate and supplemental benefits prohibited. — Notwithstanding any other provisions of this subtitle, a person may not recover benefits under the coverages described in §§ 19-504 [minimum liability coverage], 19-505 [personal injury protection coverage], 19-509 [uninsured motorist coverage], and 19-512 [collision coverage] of this subtitle from more than one motor vehicle liability insurance policy or insurer on a duplicative or supplemental loss.

In Mesmer, we were asked to consider whether an insurer’s refusal to defend its insured was an action sounding in contract or tort. 353 Md. at 249, 725 A.2d at 1056. Addressing this issue, we noted that

353 Md. at 257, 725 A.2d at 1061 (citing Brohawn v. Transamerica Ins. Co., 726 Md. 396, 409, 347 A.2d 842, 851 (1975) (stating that "the promise to defend the insured, as well as the promise to indemnify, is the consideration received by the insured for payment of the policy premiums")). Nevertheless, we recognized that an insurer can be sued by its insured in tort for wrongful failure to settle a claim. Mesmer, 353 Md. at 259, 725 A.2d at 1061. Specifically, we found that "[t]he tort action can only arise when the liability insurer acknowledges coverage, or proceeds as if there were coverage, and undertakes to provide a defense to the insured." Mesmer, 353 Md. at 262-63, 725 A.2d at 1063 (citing Allstate Ins. v. Campbell, 334 Md. 881, 393-94, 639 A.2d 652, 658 (1994) (recognizing that "if a liability insurer acts improperly in defending the insured it may become liable [in tort] to the insured")); see Mesmer, 353 Md. at 260, 725 A.2d at 1062 (quoting State Farm v. White, 248 Md. 324, 329, 236 A.2d 269, 277 (1967), which states that "the liability is in tort, not in contract, although arising out of a contractual undertaking" (quoting Sweeten, Adm’r. v. Nat’l Mutual, 233 Md. 52, 55, 194 A.2d 817, 818 (1963))).

In this case, MAIF not only acknowledged that it had a contractual obligation to defend Jones against Boyce’s claim, but actually undertook to provide a defense. Although we reserve for the moment our discussion of the record evidence that supports the trial court’s finding that MAIF acted in bad faith when it refused to settle the underlying claim, see Part III.A, we note for now that there is such evidence in the record. In light of the Mesmer standard, we hold that Appellant could maintain a tort action against Jones's insurer for bad faith refusal to settle a claim.

C.

Having concluded that Appellant’s action against MAIF arises in tort, we must now determine the proper method for calculating damages in tort actions based upon a liability insurer’s wrongful failure to settle within policy limits a claim against its insured. Ordinarily the measure of damages in a bad faith failure to settle case is the amount by which the bonafide judgment rendered in the underlying action exceeds the amount of insurance coverage. See Medical Mut. Liab. Ins. Soc’y of Maryland v. Evans, 330 Md. 1, 25, 622 A.2d 103, 114 (1993); see also Campbell, 334 Md. at 393-394, 639 A.2d at 658 (recognizing that "if a liability insurer acts improperly in defending the insured it may become liable [in tort] to the insured for the amount of judgment obtained against the insured which is in excess of the policy limits"); State Farm v. Schlossberg, 82 Md. App. 45, 63, 570 A.2d 328, 336-37 (1990) (concluding that the "proper method of assessing damages in [a bad faith refusal to settle action] is the difference between the insurance coverage and the jury verdict in the underlying [tort] case"). This method, we conclude, incorporates the application of the collateral source rule discussed in Part II.A, infra.

In the present case, the Baltimore City jury found that MAIF violated its duty to attempt to settle the underlying motor tort case in Anne Arundel County, in which Boyce was awarded $82,882 in damages, within Jones’s $20,000 policy limit. By failing to apply the collateral source rule in the bad faith tort action, the Baltimore City trial judge erred when he awarded Appellant only $32,882. We hold that the trial judge should have applied the Medical Mutual formula and awarded Appellant $62,882 (plus 10 percent interest, per annum, accruing from the 20 May 1993 award date); i.e., the $82,882 awarded to Boyce, less the $20,000 previously paid by MAIF, but excluding the $30,000 paid by HIC.

In its cross-appeal, MAIF asserts two issues: whether Appellant can succeed in a bad faith refusal to settle a claim case when both MAIF and Appellant’s predecessor-in-interest agreed the case should not be settled and when there was no unconditional settlement offered; and, whether the trial judge was correct in limiting damages in the bad faith case to the amount of money, plus interest, that Jones would have had to pay to satisfy the judgment entered against him in 1993. For the following reasons, we find that MAIF’s arguments are without merit.

In his 15 December 1999 memorandum opinion, the Baltimore City trial judge found that there was sufficient evidence in the record for the jury to have determined that MAIF should have settled Boyce’s motor tort claim for the $20,000 policy limits:

(1) Mr. Boyce through his attorney was willing to release his insurance carrier, [HIC], and thus terminate any possibility of further claims arising out of the underlying accident; and (2) MAIF did not conduct a full investigation with regard to Mr. Boyce’s head injury. Evidence of the head injury when considered with the amount of special damages asserted could have caused the jury to believe that MAIF did not act in good faith with regard to its fiduciary duty to Mr. Jones. To be sure, there was sufficient evidence, if believed, that could cause the triers of fact to find as they did.

Jones’s attorney wrote to MAIF on 24 January 1992, without copying Jones, characterizing Boyce’s attorney as thinking "he has a policy limits case and threatens us with bad faith if we do not submit our limits so that he may attack the UM carrier," but stating nonetheless that he (Jones’s MAIF-assigned counsel) was "fully prepared to try the case and roll the dice." Morever, in another letter of the same date, Jones’s attorney wrote to Boyce’s attorney, copying MAIF, but again not Jones, asserting, expressly in response to Boyce’s attorney’s 21 January 1992 letter, see note 2, supra, that "it is not my assessment of this case that it is a policy limits case for MAIF" and that "if [MAIF] offers policy limits [to Boyce], it will be against my advise and recommendation." In neither letter from Jones’s counsel was concern expressed about Jones’s exposure to a possible subrogation claim by HIC if Boyce received benefits under Boyce’s underinsured motorist coverage. Thus, even if, as MAIF argues, the injection of Boyce’s possible claim against HIC represented, as a matter of law, a contingency in Boyce’s $20,000 "unconditional" offer to settle, Jones’s exposure to a possible subrogation claim by HIC did not appear to form any part of Jones’s attorney’s or MAIF’s considerations in deciding to reject the offer. Indeed, contrary to Jones’s attorney’s testimony, an inference could be drawn that Jones was not aware of the settlement offer or its rejection, let alone any theoretical exposure to a subrogation claim by HIC.[MAIF’S ATTORNEY]: Okay. And what do you mean by subrogation right? What does that mean?

[MAIF’S DESIGNEE]: In other words, if Harleysville pays any money in this claim, then they have the right that Mr. Boyce would have to come after Mr. Jones personally.

[MAIF’S ATTORNEY]: Because Mr. Jones caused the accident?

[MAIF’S DESIGNEE]: That is correct. Mr. Jones was the at-fault party.

[THE COURT]: Are you saying that if there is UIM [uninsured/ underinsured motorist] coverage, you just don’t, and you evaluate the case at greater than policy limits that you just don’t pay it because of that?

[MAIF’S DESIGNEE]: No, I didn’t say we would not, always not pay it. We would try to get a waiver of subrogation or we would pay it. [Emphasis added].

During cross-examination, MAIF’s designee acknowledged that it made no effort in Jones’s case to seek a waiver as to HIC’s potential subrogation claim:

[APPELLANT’S

ATTORNEY]: And it is the insurance company’s obligation, is it not, if a case has a value in excess or at policy limits to settle the case for policy limits and possibly get the plaintiff to waive going after the under-insured coverage, correct?

[MAIF’S DESIGNEE]: Sure.

[APPELLANT’S

ATTORNEY]: Now there have been times when you have gone and said hey, this case could be more than $20,000 and this guy has got a UIM thing. I am going to try and see if I can get this case settled for the $20,000 and just let it all go away, right?

[MAIF’S DESIGNEE]: Yes.

[APPELLANT’S

ATTORNEY]: You didn’t do that in this case, did you?

[MAIF’S DESIGNEE]: No, we did not.

* * *

[APPELLANT’S

ATTORNEY]: If Mr. Jones had no assets or few assets, isn’t it the practice often for UIM carriers to waive subrogation if they are required to make payments?

[MAIF’S DESIGNEE]: It can be done, sure.

[APPELLANT’S

ATTORNEY]: Sure. Because they are not going to get anything. You can’t squeeze blood out of a turnip, right?

[MAIF’S DESIGNEE]: That is correct.

[APPELLANT’S

ATTORNEY]: Did you ever check to see whether or not Mr. Jones had any assets? Not you. When I am talking you, I am talking about MAIF.

[MAIF’S DESIGNEE]: I understand.

[APPELLANT’S

ATTORNEY]: I know you were not there.

[MAIF’S DESIGNEE]: I understand. There is no indication in the record that, that was done.

Confirming the absence of any documentary evidence that MAIF considered the possible HIC claim in deciding whether to accept or reject the policy limits offer from Boyce, MAIF’s corporate designee, again in response to Appellant’s counsel’s cross-examination, stated:

[APPELLANT’S

ATTORNEY]: Is there anything that you have written down or anyone has written down that says that the UIM carrier played any part in the amount of money that you offered Mr. Boyce?

[MAIF’S DESIGNEE]: No, there is nothing written in the chronology.

[APPELLANT’S

ATTORNEY]: Nothing.

[MAIF’S DESIGNEE]: That is correct.

[APPELLANT’S

ATTORNEY]: Absolutely.

[MAIF’S DESIGNEE]: That is correct.

[APPELLANT’S

ATTORNEY]: And whether Harleysville was there or not, as far as you were concerned and whether there was a UIM policy or not, as far as you were concerned, you meaing MAIF - - .

[MAIF’S DESIGNEE]: Right.

[APPELLANT’S

ATTORNEY]: Yes, this is not against you personally.

[MAIF’S DESIGNEE]: I understand.

[APPELLANT’S

ATTORNEY]: But as far as MAIF is concerned, you were not going to offer the $20,000 figure that you had in reserve, correct?

[MAIF’S DESIGNEE]: That is correct. The jury, apparently rejecting the testimony of the attorney assigned by MAIF to represent Jones in the motor tort case, could have concluded that MAIF had not proven to its satisfaction, particularly where Jones himself did not testify at the trial of the bad faith claim, that Jones had concurred with MAIF’s decision, or the attorney’s recommendation, not to settle Boyce’s claim for the $20,000 policy limit.