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Outboard Marine Corp. v. Liberty Mutual Insurance Co.

decided: June 7, 1976.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division -- No. 75 C 142 FRANK J. McGARR, Judge.

Castle, Senior Circuit Judge, Pell and Tone, Circuit Judges. Pell, Circuit Judge, concurring in part and dissenting in part.

Author: Tone

TONE, Circuit Judge.

This case is an outgrowth of a California personal injury action in which a large judgment was recovered against Outboard Marine Corporation (OMC), plaintiff here. The defendants here, two insurance companies and a California lawyer, are charged with having failed to defend OMC properly in that action.

In July 1971 one Vladimir Sabich was injured when an OMC "Trackster," an all-terrain motor vehicle in which he was riding, overturned. He filed a suit against OMC in a California state court, alleging that the vehicle was defectively designed and that OMC had known this but failed to warn users. He claimed $500,000 in actual damages and an equal amount in punitive damages. OMC gave notice of this suit to both its primary insurer, defendant Liberty Mutual Insurance Company, and its excess insurer, defendant Home Insurance Company. Liberty Mutual retained defendant John Stumbos, a California lawyer, to defend the case. Home denied coverage for punitive damages, and took no part in the defense. The case proceeded to trial, and in January 1974 the jury awarded Sabich $600,000 in actual damages and $1,250,000 in punitive damages. Following the entry of judgment in these amounts, Liberty Mutual paid Sabich $500,000, the amount of its policy limit, and Home advised OMC that on demand it would pay OMC $100,000, representing the unpaid compensatory damages. Both insurance companies having refused to prosecute an appeal, OMC itself appealed to the California Appellate Court, where the case is now pending.

The case before us is an attempt by OMC to recover from Stumbos and Liberty Mutual for the alleged mishandling of the defense of the Sabich case and from Home for failing to participate in that defense. OMC also seeks general relief against Liberty Mutual with respect to the defense of other, unnamed pending cases. OMC seeks to recover its expenses in appealing the Sabich verdict, indemnity for any liability it may have if the appeal is unsuccessful, indemnity for any liability that may be imposed in a related case brought by one Roy Howarth, and injunctive and declaratory relief relating to the conduct of Liberty Mutual in other pending cases. The District Court dismissed OMC's complaint, with prejudice as to some counts and without prejudice as to others, and denied OMC leave to file an amended complaint (which did not differ in substance from the original complaint except that a count seeking declaratory relief was added). OMC appeals from the dismissal of its original complaint and the denial of leave to amend. (The District Court dismissed without prejudice OMC's claim that the Home policy covered punitive damages. On appeal, OMC does not challenge this aspect of the order.)

OMC's allegations are in substance as follows: In the Sabich case Stumbos mishandled both discovery and trial, creating the false impression that OMC had attempted to conceal the truth and failing to prepare or present important expert testimony and experimental evidence that would have favored OMC. His conduct and that of Liberty Mutual combined to deprive OMC of several opportunities to settle the case. Before trial, Sabich offered to settle for $500,000, Liberty Mutual's policy limits, but later withdrew the offer because of Stumbos' violation of California discovery rules. The day after trial began, Sabich increased his claim to $750,000 in compensatory damages and $7,500,000 in punitive damages. OMC urged Liberty Mutual and Home to begin immediate settlement negotiations. In response, Liberty Mutual made a token settlement offer. Midway through the trial, Sabich offered to settle for $750,000. Liberty Mutual refused, however, to offer more than $150,000, despite the urgings of its claims manager and of Stumbos, who had evaluated OMC's probable liability at over $1,250,000.

After the trial, OMC alleges, Sabich's lawyer contacted OMC and threatened to file a class action against it on behalf of all Trackster owners, but offered, if OMC would pay the judgment rather than appealing, to refrain from filing the class action and vacate the Sabich judgment to prevent its future use for collateral estoppel purposes. When OMC filed its appeal, the attorney proceeded to file a class action in which Roy Howarth, the owner of the Trackster in which Sabich was riding when he was injured, purports to represent the class. The Howarth complaint alleges that the Trackster is so defectively designed as to be worthless, that OMC intentionally concealed those defects, and that Howarth only discovered the defects when the Sabich verdict was returned. The demand is for actual damages of $12,000,000, which is the aggregate of the purchase prices paid by the class, together with punitive damages of $26,000,000. The Howarth case has not yet reached trial.

For purposes of this appeal, we consider the amended complaint as if it had been filed. See Asher v. Harrington, 461 F.2d 890, 895 (7th Cir. 1972); Fox v. City of West Palm Beach, 383 F.2d 189, 195 (5th Cir. 1967). It seems to be agreed that substantive questions of law are controlled by California law.

I. Prematureness

On the basis of the alleged negligence and bad faith of Stumbos and Liberty Mutual in connection with the Sabich case, OMC seeks to recover its expenses in pursuing the Sabich appeal ($27,000, according to the amended complaint), indemnity for any amount it may have to pay Sabich, and punitive damages. The District Court dismissed these claims without prejudice, on the ground that they were premature because the Sabich judgment was not yet final.

The law of California on this point appears to be that a claim for malpractice arises when the client sustains a substantial monetary injury, as he does when he pays attorneys' fees or posts an appeal bond as a result of the malpractice. Budd v. Nixen, 6 Cal. 3d 195, 98 Cal. Rptr. 849, 853, 491 P.2d 433, 436-437 (1971).*fn1 The same rule would presumably apply to a claim against an insurer for conduct analogous to malpractice. OMC's claims against Stumbos and Liberty Mutual therefore arose when OMC made substantial expenditures in pursuing its appeal.

Apart from OMC's right to sue on claims that have accrued, refusal to permit it to do so would be manifestly unjust. Under the Budd case, the statute of limitations began to run on OMC's claims when they accrued. While Stumbos' counsel has offered to waive the statute of limitations, Liberty Mutual has refused to do so. Even if the court had discretion to refuse to entertain the claims until all damages were ascertainable, that discretion should not be exercised when the result is likely to be barring of the claim by the statute of limitations.*fn2

Stumbos and Liberty Mutual maintain that reversal of the Sabich judgment would establish that the judgment was the result of error on the part of the California trial judge rather than their negligence. OMC may be able to show, however, that proper handling of the case would have prevented the trial errors (e.g., because the case would have been settled) or would have produced a favorable verdict despite the trial errors. Alternatively, it might be able to ...

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