Court Opinion

ID: 9459377
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:19:03.423224+00
Date Added: 2024-06-11T17:36:08.634566
License: Public Domain

BRIGHT, Circuit Judge,
separately concurring and dissenting, in which GIBSON and STEPHENSON, Circuit Judges, join.
I join in the concurring and dissenting opinion of Judge Stephenson but add my additional views in this case. I feel this case is important, relating, as it does, to the imposition of liability upon an insurer to pay to claimants an amount in excess of policy limits.
The obligation of the insurer toward its insured needs to be evaluated realistically, not by way of hindsight. In this *1024case, application of the literal language of the policy might not impose any liability on the insurer. The language of the policy extended coverage to a newly acquired automobile if the company insures “all * * * automobiles owned by the insured on the date of its acquisition.” While the insured purchased a “newly acquired” 1967 Pontiac automobile, he retained ownership of a disabled Oldsmobile which was never brought under the liability policy coverage as well as a 1966 Pontiac which was specifically described in the policy. However, the district court determined that American Family’s liability policy extended to the third (Pontiac) automobile because the second (Oldsmobile) automobile, when delivered to the seller’s garage, proved to be unrepairable and thus no longer needed to be considered as a car owned by the insured. Thus the “newly acquired automobile” clause applied to the 1967 Pontiac acquired by the named insured only because the trial court created an exception to the literal language of the policy. Although this construction may be a permissible one, nothing in this record indicates that the insurance carrier should have reasonably anticipated that ruling.1
Given the paucity of authority on the subject, we believe the insurer was entitied to view its policy defense as meritorious and justified, subject only to the usual vagaries and uncertainties of litigation.
The panel hearing this appeal initially, on the basis of the Comunale2 case, ruled that the insurer’s good faith could not limit its liability for all damages flowing from a breach of contract. Thus, under this contract theory, the insurer who mistakenly relies on a policy coverage defense and fails to consider a settlement within the policy limits becomes strictly liable to the insured for a judgment in excess of the policy limits.
As I understand the opinion on rehearing, three judges not on the original panel and the three concurring and dissenting judges reject the application of the Comunale rule to this case. Although the strict liability rule in Comunale has been frequently cited, this rule has been infrequently applied.3
Moreover, the Comunale decision was based upon a particular interpretation of California contract law, which is distinguishable from the construction given by the South Dakota Supreme Court to sections of the South Dakota Code which deal with the measure of damages flowing from breach of contract.4
*1025Recently, the South Dakota Supreme Court, in Big Band, Inc. v. Williams, 202 N.W.2d 121 (S.D.1972), said of these sections:
When the action is for breach of contract, plaintiff is entitled to recover all his detriment proximately caused by the breach, not exceeding the amount he would have gained by full performance. (Emphasis supplied) [Id. at 123.]
The limiting phrase emphasized in the above quotation casts grave doubt upon the applicability in South Dakota of the sweeping pronouncement of Comunale.
The strict liability doctrine of Comunale represents a minority view which I do not believe would be followed in South Dakota and which the trial court properly rejected.
Courts seem to have applied three different rules in circumstances analogous to those in the instant case, as follows:
1) A rule that a good faith but mistaken declination of coverage insulates the insurance carrier from an excess judgment for refusal to accept an offer of settlement within the policy coverage. This is the rule which Judge Nichol applied in the trial of this case and which was also applied by the Fifth Circuit in Beck v. Pennsylvania National Mutual Cas. Ins. Co., 429 F.2d 813 (1970) (Pennsylvania law), the Tenth Circuit in State Farm Mutual Ins. Co. v. Skaggs, 251 F.2d 356 (1957) (Oklahoma law), and National Service Fire Ins. Co. v. Williams, 454 S.W.2d 362 (Tenn.App.1969).
2) The Comunale rule, Comunale, supra, 50 Cal.2d 654, 328 P.2d 198, of per se liability based on the California statutory law, which rule is not applied in this ease by a majority of the court.
3) A middle view which holds an insurer liable for more than the policy limits when the insurer, after declining coverage in good faith, is shown to have failed to exercise good faith in refusing to settle or consider settlement of the claim within the limits of the policy. I construe the following cases to reflect this view: Western Casualty & Surety Co. v. Herman, 405 F.2d 121 (8th Cir. 1968); Foundation Reserve Ins. Co. v. Kelley, 388 F.2d 528 (10th Cir. 1968) (undisputed facts demonstrate bad faith refusal to settle as a matter of law); Gordon v. Nationwide Mutual Ins. Co., 30 N.Y.2d 427, 334 N.Y.S.2d 601, 285 N.E.2d 849 (1972); Landie v. Century Indemnity Co., 390 S.W.2d 558 (Mo.App. 1965).
The initial panel opinion adopted the second rule. Although the majority of judges sitting en banc adopt the third rule, three judges of this en banc court join in the reversal of the district court for an alternate reason. These judges hold that, in considering whether a refusal to settle is in good or bad faith, the trier of fact should not give weight to a policy defense held in good faith by the insurer. I believe this view to be erroneous.
The rule applied does not reflect South Dakota law. I note with interest that the majority of this court has adopted this rule as the law of South Dakota without giving the trial judge an opportunity to state his views of South Dakota law.5 The alternate theory rests solely *1026on the language of two cases arising under Missouri law; Western Casualty, supra, and Landie, supra. The opinion on rehearing cites no South Dakota case. Yet in Kunkel v. United Security Ins. Co. of New Jersey, 84 S.D. 116, 168 N.W.2d 723 (S.D.1969), in applying a “bad faith” standard in establishing an insurer’s liability to pay more than policy limits for refusing to settle, but where no coverage issue existed, the South Dakota Supreme Court indicated that “any * * * factors tending to establish or negate bad faith on the part of the insurer” should be considered. The Kunkel court said:
Good faith is a broad and comprehensive term. Whether an insurer had adhered to it usually depends upon circumstances and elements involved in a particular case. The decision not to settle must be thoroughly honest, intelligent, and impersonal. It must be a realistic decision tested by the expertise which an insurer necessarily assumes under the terms of its policy. * * *
* * * While no single satisfactory test has been formulated as to what constitutes good or bad faith courts uniformly hold that the insured’s interests must be considered. It appears to have been most frequently held the insured’s interests must be given “equal consideration” with those of the insurer * * *. [168 N.W.2d at 726.]
In light of this language of the Supreme Court of South Dakota, the majority has ignored the local law in this diversity case contrary to the mandate of Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).
In summary, the majority of judges on this en banc court have disapproved of the application of the per se rule of the Comunale case, discussed above. I join in this disapproval.
The majority of the court, however, have ruled that the insurer’s good faith policy defense should not be considered as a factor in determining whether the insurer’s refusal to settle a case was in bad faith. I join Judges Gibson and Stephenson in rejecting this theory. Bad faith, or its converse good faith, is discernable only by taking into account all the circumstances of a particular case. The strength of a policy defense plays an important role in the evaluation of a settlement offer. Logically, this factor should be assessed in determining the existence of good faith of the insurer in refusing a settlement offer. In this case, that offer was for almost the full amount of the policy limits. I do not believe the views of the majority can be justified on the basis of sound judicial policy applicable to cases of this kind nor as consistent with South Dakota law as reflected in Kunkel, supra.
Accordingly, I would remand this case to the district court for its further consideration.

. For instance, the case of Canal Insurance Co. v. Brooks, 201 F.Supp. 124, 127 (W.D.La.1962), aff’d, 309 F.2d 751 (5th Cir. 1962), relied upon by the district court for its decision on coverage, is not directly in point. In the Canal Insurance Co. case, the omission of the insured, pointed to by the insurer, was the failure to list a certain boat trailer and other unserviceable semitrailers as vehicles which the insured owned. The policy called for a listing of all owned automobiles. No South Dakota court had considered a similar problem of coverage.

. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 328 P.2d 198 (Cal.1958).

. The panel decision has cited Western Casualty & Surety Co. v. Herman, 405 F.2d 121 (8th Cir. 1968), and Landie v. Century Indemnity Co., 390 S.W.2d 558 (Mo.App.1965), as cases supporting the application of the Comunale rule. In Herman, our affirmance rested upon a specific finding of fact by the district court, Herman v. Western Casualty & Surety Co., 271 F.Supp. 502 (E.D.Mo. 1967), that the insurer was guilty of bad faith in refusing to settle, notwithstanding that it had sought to litigate a good faith policy defense. In Landie, the case authority which underlay our Herman decision, the Missouri court, in affirming an excess judgment over the policy limits, made this xiertinent observation,
From this fact situation the jury could well have found, as they did, that the [insurance] company acted in bad faith in refusing to settle. [Landie, supra, 390 S.W.2d at 566.]

. The pertinent sections read :
For the breach of an obligation arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result *1025therefrom. No damages can be recovered for a breach of contract which are not clearly ascertainable in both their nature and their origin. [S.D.C.L. § 21-2-1 (1967).]
Notwithstanding the provisions of these statutes, no person can recover a greater amount in damages for the breach of an obligation than he could have gained by the full performance thereof on both sides [with exceptions not here applicable], [S.D.C.L. § 21-1-5 (1967).]

. In fact, the majority has completely disregarded the obligation to give “special weight” to the determination of local law by a district judge. Panel slip opinion at 7. Although the district court, on determining good faith, initially gave conclusive weight to the insurer’s assertion that it did not believe the insured to be covered under the policy, the majority has declined to allow the trial judge to determine whether, under South Dakota law, a refusal to grant policy coverage made in good faith is even a factor in assessing whether a rejection of a settlement offer was made in good faith.