Reid v. Ruffin ( 1983 )

OPINION

ZAPPALA, Justice.

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. 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 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 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 conceive of an agency relationship wherein the principal has no authority to require his agent to perform an act on his behalf.

We think it is abundantly clear that Security authorized Granite to act on its behalf only “in those instances where an immediate decision is necessary and it is impracticable to obtain the consent of the Reinsurer.” Otherwise, settlement was not to be made without Security’s consent. Thus if Granite can be said to be the agent of Security, it is only to the limited extent of instances where an immediate decision to settle is necessary. Because those circumstances are not present in this case, and because the decision which resulted in a finding of bad faith was Granite’s decision not to settle, a decision over which Security had no control, the bad faith of the insurer cannot be imputed to the reinsurer.

The Appellant makes a separate argument that, apart from the principal-agent theory, he is entitled to recover directly from Security for its own bad faith in refusing to settle. He asks this Court, in effect, to abandon the privity of contract requirement and impose a duty on the reinsurer to act in a certain way toward the original insured. This argument is made without citation to supporting cases and despite overwhelming authority from numerous jurisdictions to the contrary. See Schuylkill Products, Inc. v. H. Rupert & Sons, Inc., 305 Pa.Super. 36, 451 A.2d 229 (1982) and cases cited therein.

We find no reason to overrule those decisions which permit no action by an original insured against a re-insurer because of lack of privity. The reason for the rule is inherent in the nature of the reinsurance contract. Reinsurance is

the ceding by one insurance company to another of all or a portion of its risks for a stipulated portion of the premium, in which the liability of the reinsurer is solely to the reinsured, which is the ceding company, and in which contract the ceding company retains all contact with the original insured, and handles all matters prior to and subsequent to loss____

The reinsurance situation arises ... [when] the ceding company finds that it has more risks than it cares to keep in its own portfolio____ The original insured is not notified of the reinsurance, has no contact with the reinsuring company, and is generally not a party to the contract and has no legal interest therein.

13A Appleman, Insurance Law and Practice § 7681 (1976) (emphasis added).

In Cowden v. Aetna Casualty & Surety Co., 389 Pa. 459, 468, 134 A.2d 223, 227 (1957) this court held that an insurer may be held liable “if the insurer’s handling of the claim, including a failure to accept a proffered settlement, was done in such a manner as to evidence bad faith on the part of the insurer in the discharge of its contractual duty.” (Emphasis added). This “contractual duty” is, of course, the duty arising from the insurer’s promise to defend the insured regardless of the policy limits. In Gray v. Nationwide Mutual Insurance Co., 422 Pa. 500, 508, 223 A.2d 8, 11 (1966), we reiterated that the case law

employing contractual terms for the obligation of the insurer to represent in good faith the rights of the insured, indicates that a breach of such an obligation constitutes a breach of the insurance contract for which an action of assumpsit will lie. (Emphasis added).

Because the reinsurer has not assumed a contractual duty to represent the original insured, he has no obligation to the original insured which he must discharge in good faith. The reinsurer’s only obligations are toward the reinsured/original insurer and arise out of their contract. Because the Appellant is not privy to that contract and has no interest therein, no enforceable rights inure to his benefit therefrom.

As there is no basis for imputing the bad faith of the original insurer, Granite, to the reinsurer, Security, and as there is no basis for permitting the original insured to proceed directly against the reinsurer, the Superior Court was correct in reversing the judgment of the trial court.

The judgment of the Superior Court is affirmed.

FLAHERTY, J., filed a dissenting opinion in which ROBERTS, C.J., and HUTCHINSON, J., joined.