Appeal from the United States District Court for the Eastern District of Wisconsin. No. 82 C 341 -- Terence T. Evans, Judge.
Cummings, Chief Judge, Wood and Posner, Circuit Judges.
The appeal in this diversity case presents the question whether Wisconsin law recognizes a cause of action by the insured against the insurer for alleged bad faith in handling a third party claim where the insurer settled the claim within the insured's policy coverage. We affirm the district court's holding that Wisconsin law does not recognize such a bad faith cause of action.
Defendant-appellee Continental Casualty Company (Continental), an Illinois corporation, issued to plaintiff-appellant A.W. Huss Company (Huss), a Wisconsin corporation, two insurance policies: (1) a policy of comprehensive automobile liability insurance effective June 1, 1976 to June 1, 1977 with bodily injury limits of liability of $100,000, and (2) an umbrella excess third party liability policy effective June 1, 1976 to June 1, 1977 with liability limits of $1,000,000 per occurrence. On May 20, 1977, and within the effective period of the aforedescribed coverages, a truck owned by Huss and driven by one of its employees collided at a Manitowoc, Wisconsin, intersection with an automobile driven by Patricia Mangin. The impact of the truck severely affected passenger William Mangin, Patricia's brother, who was rendered unconscious. Due to the accident he walks with a limp, must wear a back brace, and suffers from numerous other severe physiological impairments.
William Mangin subsequently commenced an action in Wisconsin circuit court against Huss arising out of the accident and Continental retained counsel to defend Huss against the suit. Continental's obligation to defend Huss is embodied in the comprehensive automobile liability policy issued to Huss, which provides in pertinent part:
The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of
to which this insurance applies, caused by an occurrence and arising out of the ownership, maintenance or use, including loading and unloading, of any automobile, and the company shall have the right and duty to defend any suit against the insured seeking damages of such bodily injury or property damage, even if any of the allegations of this suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company's liability has been exhausted by payment of judgments or settlements. (Supp. App. p. 10) (emphasis added).
Continental investigated the claim and entered into extensive settlement negotiations with Mangin's attorney. After the accident it was unclear to the parties in the Wisconsin suit whether Huss also had an umbrella policy. Continental's initial settlement offers were in the $50,000 to $75,000 range and were rejected by Mangin. Continental's agent handling the claim learned of the $1 million umbrella coverage in September 1977, but Mangin's attorney through his inquiries did not learn of the umbrella coverage until March 1979. The proposed settlement figures increased, supported by early indications that Huss' driver may have been exceeding the speed limit at the time of the accident. In a July 23, 1979, letter to Huss, Continental's attorney advised that Huss "may want to retain personal counsel in this case" and that Continental would cooperate with any counsel retained by Huss (Ex. Q). Plaintiff retained two attorneys as of August and October 1979. Settlement negotiations continued, Continental settling the claim within the policy limits in May 1981, before trial in the amount of the total policy coverage -- $1.1 million. The case was dismissed on May 18, 1981, and Continental paid the entire settlement of $1.1 million.
Huss commenced this action against Continental claiming Continental acted in bad faith in settling the Mangin action. Huss alleges Continental delayed settlement, and that Continental had knowledge to the effect that Huss' liability was clear and Huss clearly would have been liable for damages far in excess of the $1.1 million policy limit had Continental not settled. Huss cites a letter from Continental's attorney to Huss dated July 31, 1979, which discusses the opinions of reconstruction experts in the case which opined that Huss' driver was exceeding the speed limit when the accident occurred. At this point in time, asserts Huss, Continental possessed the knowledge that Huss clearly would have been liable for a substantial excess judgment had the action gone to trial. Huss reasons that Continental had a duty to settle the case at this time, and not in May 1981. Huss claims $1,000,000 damages for "concern", "anxiety", and business loss, $13,207.01 in attorneys' fees allegedly incurred in monitoring Continental's activities in defending the claim asserted against Huss, attorneys' fees for prosecuting this action, and $2,000,000 punitive damages. It also contends that Continental's delays caused Huss to seek the protection of Chapter 11 of the Bankruptcy Code.
Continental moved for summary judgment on February 1, 1983, on the grounds that no genuine issue of material fact exists and defendant is entitled to judgment as a matter of law. Although Continental denies Huss' allegations as indicated in Continental's answer to Huss' complaint, for purposes of summary judgment Continental accepted Huss' allegations as true in an effort to reach the dispositive legal issue in this case. Continental asserted in its motion that Wisconsin law (the parties do not dispute that Wisconsin law governs this case) does not recognize plaintiff's purported bad faith cause of action. Although as Continental conceded, the Wisconsin courts have never specifically addressed the precise substantive issue raised in this case, defendant argued that the Wisconsin Supreme Court, in related decisions, has clearly defined the permitted scope of a bad faith cause of action against an insurer arising out of a third party liability insurance contract. Outside of the worker's compensation context, defendant argued that under Wisconsin law an insurer can be sued for bad faith regarding the insurer's conduct in settling a third party claim only where the insured was found liable for a judgment in excess of the policy coverage. In this case Continental defended and settled the claim within the policy limit, Huss escaping with impunity. Accordingly, as Continental argued, it fulfilled its duty toward Huss under Wisconsin law.
On March 24, 1983, 560 F. Supp. 513 the district court, 560 F. Supp. 513, entered an order granting Continental's motion for summary judgment. Judge Evans in reviewing Wisconsin case law observed that no legally cognizable damage occurred as a result of defendant's alleged bad faith without harm inuring to plaintiff by ...