Opinion ID: 1209086
Heading Depth: 2
Heading Rank: 5

Heading: Liability Above Face Amount of Policy

Text: The jury found that Continental had acted negligently, and it awarded B & R $618,000 in compensatory damages. Since the jury failed to find that Continental had acted in bad faith, Continental contends that the trial court erred in denying its motion for judgment notwithstanding the verdict or a new trial. Continental argues that its liability could not exceed policy limits: The jury's finding that Continental `negligently defended its insured' cannot support an award of damages greater than the carrier's $100,000 obligation under the policy. We reject Continental's argument and join those jurisdictions holding that an insurer, defending an action against the insured, is bound to exercise that degree of care which a man of ordinary prudence would exercise in the management of his own affairs, and if the insurer fails to meet that standard it is liable to the insured for the excess of the judgment over the policy limits, irrespective of fraud or bad faith. That is to say, an insurer undertaking a defense must exercise not only good faith, but also ordinary care and reasonable diligence and caution. 7C J. Appleman, Insurance Law and Practice § 4687, at 1780 (Berdal ed. 1979) (footnotes omitted, emphasis added). See Crisci v. Security Insurance Co., 66 Cal.2d 425, 58 Cal. Rptr. 13, 17-18, 426 P.2d 173, 177-78 (1967); Rova Farms Resort, Inc. v. Investors Insurance Co. of America, 65 N.J. 474, 323 A.2d 495, 507-13 (1974). [20] We think the responsibility devolving upon the insurer under modern conditions is accurately described as follows: It has more than a duty of care of an ordinary man unskilled in litigation; it must exercise more than mere good faith. It is a professional which advertises by all media of mass communication its skill in the investigation, settlement, and litigation of liability cases. It asks the individual, who is an amateur in these matters but who would be deeply concerned over a case in which he is personally interested, to substitute its skill for his, its judgment for his judgment, and its conduct for his own acts. It then becomes chargeable with a greater duty  even as the brain surgeon must exercise greater knowledge, judgment, and skill in a brain operation than would a general practitioner of medicine. It is not an extraordinary degree of care but the care that is required under these particular circumstances. It must use skill diligently and adequately to investigate a case, it must use skill in negotiation, it must select skilled trial counsel  not the lowest priced member of the bar  and that individual, so selected by it, may bind the insurer by this derelictions. It is not a comfortable spot for a liability insurer to occupy, but it seeks the business on the basis of its skill. Even as an attorney, abstractor, accountant or physician may be liable if he fails to use the degree of skill in the handling of a professional matter that one is entitled to expect of one possessing like training and abilities, so must the insurer accept legal duties commensurate with its responsibilities. 7C J. Appleman, supra at § 4687, at 181-82 (footnote omitted, emphasis added). Continental also contends that an insurance company may not be held liable over policy limits for the negligence of an attorney such as Gantz, arguing that one in his position is an independent contractor. Much of the testimony that was introduced at trial to establish the negligence of Continental actually related to the conduct of Gantz, the attorney retained by Continental to represent B & R. [21] Continental urges us to adopt the rule that an insurer cannot be held vicariously liable for the negligent conduct of an independent trial attorney whom the carrier has hired to conduct litigation. In Merritt v. Reserve Insurance Co., 34 Cal. App.3d 858, 110 Cal. Rptr. 511 (1973), the California Court of Appeal held that if an independent attorney, retained by an insurer to perform professional services, negligently conducts the defense of the insured, the remedy for this negligence is found in an action against counsel for malpractice and not in a suit against counsel's employer to impose vicarious liability. Id. at 527. The Merritt court reasoned that the insurance company should not be held liable for the negligent acts of its independent contractor, especially since the duty to defend an insured is delegable. Under Alaska law, if Gantz is viewed as an independent contractor and not an agent, Continental could not necessarily be held liable for his negligence. See Morris v. City of Soldotna, 553 P.2d 474 (Alaska 1976). We decline to follow Merritt in this case. Gantz was selected by Continental to carry out its contractual duty to defend B & R. While there is no suggestion that in doing so his motives and intent were anything but honorable, it is quite apparent that both Gantz and Continental believed that his first loyalty was to Continental, and that throughout the course of the litigation he acted for and on behalf of the insurance company. For example, on December 20, 1972, Gantz advised Stanford of the superior court's order imposing sanctions. In a letter to Stanford he stated: It is our judgment that the action taken by the Judge is sufficiently serious and there is sufficient doubt as to the legality of his action that we should file a Petition for Review to the Supreme Court and ask for a stay of the trial until that petition is ruled on. We will not proceed with such action, however, until you have contacted the insurance carrier and have received word that this is in accordance with their wishes. [Emphasis added.] Further indication of this overriding concern for the insurer can be discerned from the fact that it was Gantz who suggested to Stanford at that time that the company should sent a reservation of rights letter and Gantz who prepared a draft of the same for the company's consideration. Given these circumstances, we reject the holding in Merritt for the view expressed in Smoot v. State Farm Mutual Automobile Insurance Co., 299 F.2d 525 (5th Cir.1962): The duty to defend is an important and frequently distinguishable part of the insurance contract. Those whom the Insurer selects to execute its promises, whether attorneys, physicians, no less than company-employed adjusters, are its agents for whom it has the customary legal liability. Id. at 530 (citations and footnote omitted). Thus we conclude that the superior court properly denied Continental's motion for judgment notwithstanding the verdict or a new trial. [22]