Before HASTINGS, Chief Judge, SCHNACKENBERG and KILEY, Circuit Judges.
Plaintiff John Klingman brought this action against defendant National Indemnity Company (National) to recover damages occasioned by defendant's alleged bad faith in failing to settle within its policy limits a claim for personal injuries arising out of an automobile accident. Based on plaintiff's complaint, defendant's answer, defendant's motion for summary judgment and affidavits in support of and in opposition to such motion, the district court granted summary judgment,*fn1 dismissing plaintiff's complaint on the merits. This appeal followed.
The following facts appear from the pleadings and affidavits relied on by the district court in entering summary judgment.
On August 16, 1958, plaintiff, driving his own automobile, was involved in a collision with an automobile driven by Delima Mondor. Delima Mondor and her husband subsequently brought suit in the circuit court in St. Croix County, Wisconsin against Klingman and National as Klingman's insurer. Mrs. Mondor alleged that Klingman was negligent and sought to recover for personal injuries sustained as a result of the collision. Mr. Mondor, who was not involved in the accident, sought recovery for damages sustained by him as a result of his wife's injuries.*fn2
After the Mondors' suit was commenced, but before trial, National notified Klingman that it would neither defend him nor afford coverage to him under its policy because of misrepresentations by Klingman in his application for the insurance. After National's refusal to defend him or afford coverage, Klingman hired an attorney to conduct the defense on his behalf in the state court action. National filed a separate answer denying the allegations of negligence and interposing an affirmative defense claiming the insurance policy was void because of Klingman's alleged misrepresentations in his application for the insurance.
Before and during the trial of the state court action, the Mondors offered to settle their claims for $10,000, the limit of National's liability under its insurance policy. Klingman in each instance demanded that National accept the offer and settle the claims, but National refused.
The issue of coverage raised by National's affirmative defense was tried to the court which found that National had no valid policy defense. The negligence issues were tried to the jury which found Klingman guilty of gross negligence and assessed 90% of the combined causal negligence to him and 10% to Mrs. Mondor. So far as relevant to the case at bar, judgment was entered for the Mondors in the state court actions in the aggregate sum of $36,150.85, of which $10,000 was against National and $26,150.85 was against Klingman.
On appeal to the Supreme Court of Wisconsin, the judgment against Klingman and National was affirmed. The trial court's holding that National had no valid policy defense was upheld. The jury's finding that Mrs. Mondor was guilty of 10% of the causal negligence was reversed on the ground that there was no evidence to support such a finding.*fn3 Martell v. Klingman, 11 Wis.2d 296, 105 N.W.2d 446 (1960).
National satisfied the judgment against it. The judgment against Klingman in the amount of $25,150.85 remains unsatisfied, and he now seeks to recover this amount in the instant action.
It is the rule in Wisconsin that an insurer must exercise good faith in choosing to litigate a claim against its insured instead of accepting an offer of settlement within policy limits. Byrnes v. Phoenix Assurance Company of New York, 7 Cir., 303 F.2d 649 (1962); Berk v. Milwaukee Automobile Ins. Co., 245 Wis. 597, 15 N.W.2d 834 (1944).
In the case before us, plaintiff Klingman contends not only that defendant National was guilty of bad faith in refusing to settle the claim on its merits but also was guilty of bad faith in asserting the policy defense.
The question of whether an insurer owes an insured the duty of good faith in asserting a policy defense has not arisen in Wisconsin. It is a logical extension of the good faith rule to hold an insurer to such a duty. We conclude that under Wisconsin law an insurer must exercise good faith in asserting a policy defense which would defeat coverage instead of accepting an offer to settle a claim within its policy limits.
It is plaintiff Klingman's theory that defendant could not reasonably have concluded that it could prevail on its policy defense and was therefore guilty ...