Appeal from the United States District Court for the Northern District of Indiana, South Bend Division. Civil No. S 74-158 - Allen Sharp, Judge.
Before CASTLE, Senior Circuit Judge, WOOD, Circuit Judge, and WYZANSKI, Senior District Judge.*fn*
WOOD, Circuit Judge. The question presented on appeal is whether the district court properly granted defendant-appellee's motion for a summary judgment in a diversity action alleging tortious breach of contract by an insurance company in handling a claim by plaintiff-appellant under the uninsured motorist provisions of an automobile insurance policy. We reverse.
On July 14, 1973 Economy Fire & Casualty Company (Economy) issued an automobile insurance policy to Fred Craft for a one year period ending July 14, 1974. Under Part IV of the policy, Economy agreed to pay certain sums to Craft in the event that a member of the Craft family should become legally entitled to recover damages for bodily injuries caused by an accident involving an uninsured motorist.On August 31, 1973 Joanne Craft, the 11 year old daughter of the Crafts, was struck by an automobile while riding her bicycle on the side of a road. The automobile was driven by Michael Stanchin, who was intoxicated at the time and subsequently found guilty in an Indiana state court of driving under the influence. The accident resulted in severe bodily injuries to Joanne Craft. Stanchin was not insured at the time.
On September 21, 1973 the Crafts' attorney, Alexander Lysohir, notified Economy that the Crafts intended to make a claim under the uninsured motorist provisions of their policy based on the August 31 accident. Lysohir subsequently filed a formal notice of claim and requested that all contacts with the Crafts be made through his office. Economy responded by letter dated October 18, 1973 stating that adjuster Dan Williams would be handling the matter for Economy and requesting the submission of medical reports, a list of medical expenses, and any other information relating to the claim. Medical bills, totaling $8,486.88, were submitted in January, February and May of 1974. Economy received a medical report in February and did an activities check on Joanne's status in April. Economy also received a copy of the police accident report.
In February, 1974 Williams requested an opportunity to interview Joanne Craft regarding the circumstances surrounding the accident. Lysohir declined to allow the interview, but agreed that a series of written questions could be submitted for Joanne to answer. Economy provided such a list on February 28, 1974 and on March 14 Lysohir gave Economy a copy of Joanne's signed statement in response. On May 16, Williams interviewed Joanne's biking companion at the time of the accident, Miss Golichowski, who mentioned that a man from another insurance company had talked to her.
As early as February, 1974 Lysohir demanded that Economy pay the full $15,000 policy limits and repeated that demand in May of that year. At the outset Economy placed a $4,5000 reserve on the Craft claim, which was increased to $14,500 on February 26, 1974. On several occasions Williams asked his superiors for authority to settle the claim for the full policy limits. Instead, only a $10,000 settlement offer was authorized, which was promptly rejected by the Crafts.On July 3, 1974 Lysohir sent Economy a letter which stated that creditors were hounding the Crafts for medical bills causing Mrs. Craft considerable anxiety and embarrassment and which threatened litigation unless the policy limits were paid by July 15, 1974. Because of vacations, the letter was not read by anyone at Economy until July 22, three days after the Crafts had already filed this suit for tortious breach of contract. On July 22, Jesse Black, Williams' supervisor, telephoned Lysohir and explained that he would obtain settlement authority for the full policy limits in exchange for all claims, including dismissal of the present suit. The offer was refused. Economy then filed an answer in the district court and took depositions from Joanne and Fred Craft. Following those depositions, Economy filed a petition with the court admitting liability on the uninsured motorist claim and deposited the $15,000 policy limits into court. In addition, Economy paid in $2,000 under the medical payment provisions, even though no claim had been made under them.
Shortly after filing the present suit in federal district court, Craft filed a suit in state court against the uninsured motorist, Stanchin. No notice of the suit was given to Economy, who found out about it indirectly in December of 1975. Economy took no action with respect to the state court suit until September 2, 1976 when it successfully sought leave to intervene as a defendant following the decision of the Indiana Court of Appeals in Vernon Fire & Casualty Insurance Co. v. Matney, 170 Ind. App. 45, 351 N.E.2d 60 (1976). Economy states that the reason for its intervention was to avoid being bound in the present suit by a state court judgment on the issue of its liability under the insurance contract. On December 16, 1976 during a pretrial conference in the district court, Lysohir agreed not to attempt to bring the results of the state court proceeding into federal court. Accordingly, after an order was obtained from the district judge formalizing this result, on February 11, 1977 Economy obtained permission from the state court to withdraw. On April 26, 1977 the district court granted Economy's motion for summary judgment. Appeal was taken to this court pursuant to 28 U.S.C. § 1291.
The question before this court under Rule 56 of the Federal Rules of Civil Procedure is whether the court below was correct in finding that there is no genuine issue as to any material fact and that Economy is entitled to a judgment as a matter of law. Craft attacks both the findings of fact and conclusions of law upon which the ruling of the lower court was based.
The key question of law presented is whether under Indiana law*fn1 there is an implied covenant in automobile insurance policies that the insurance company will handle claims under the uninsured motorist coverage of the policies fairly and in good faith. Since it appears that this precise question has not been decided by the Indiana courts, we must approach the problem indirectly. We begin our inquiry with the observation that Indiana law has recognized the existence of an implied duty of good faith and fair dealing with regard to other types of insurance coverage. Vernon Fire & Casualty Insurance Co. v. Sharp, 264 Ind. 599, 349 N.E.2d 173 (Ind. Sup. Ct. 1973) (Fire insurance); Rex Insurance Co. v. Baldwin, 163 Ind. App. 308, 323 N.E.2d 270 (1975) (Life insurance); Sexton v. Meridian Mutual Insurance Co., 166 Ind. App. 529, 337 N.E.2d 527 (Ind. App. 1975) (Fire insurance). Economy, however, suggests that uninsured motorist coverage presents a situation materially different from those other types of insurance. They argue that the uninsured motorist policy provides for substituted liability whereby the insurer takes the place of the uninsured motorist, thus creating an adversary relationship which is inconsistent with the existence of an implied duty of good faith and fair dealing.
Unlike the Indiana courts, the courts of Florida and California have dealt directly with this question, but with differing results. In Richardson v. Employers Liability Assurance Corp., 25 Cal. App. 3d 232, 102 Cal. Rptr. 547 (1972), the California Court of Appeals for the Second District found that a duty of good faith is implied in law with respect to uninsured motorist coverage based on "[a] reasonable expectation of the insured under such protection... that his claim will be handled by the insurer promptly, fairly and in good faith." 25 Cal. Rptr. 3d at 244. On the other hand, the Florida First District Court of Appeals, by a closely split decision in Baxter v. Royal Indemnity Co., 285 So. 2d 652 (Fla. App. 1973), concluded that where the insurance policy provided that the parties could resort to arbitration if they could not agree on a claim under the uninsured motorist coverage, it "would appear immaterial whether... [the insurer's decision to demand arbitration]... was motivated by good faith, self-interest, malice, spite, or indifference." 285 So. 2d at 656.*fn2 We believe that the Indiana courts are more likely to follow Richardson than Baxter.
The insurance policy here in question makes the insurer liable to its insured for damages which the insured becomes legally entitled to recover from an uninsured motorist. There is also a provision stating that the "determination as to whether the insured... is legally entitled to recover such damages, and if so, the amount thereof shall be made by agreement between the insured... and the company, or, if they fail to agree, by arbitration." (Part IV, Coverage). We conclude that there is nothing inherent in the nature of uninsured motorist protection that is inconsistent with a requirement that the insurance company attempt in good faith to reach agreement with its insured and that any attempt to force the insured to settle for less than his claim be predicated on a bona fide dispute as to the amount of liability. In reaching this conclusion we concur both with the court in Richardson and with the author of what one Indiana court has termed the "definitive treatise" in this field*fn3 - Widriss, A Guide to Uninsured Motorist Coverage - the 1976 supplement to which states:
It seems at this juncture that a standard of conduct for the insurer predicated on requiring the company to deal with its insured in good faith is the appropriate one ...