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Trujillo v. State Farm Mutual Automobile Insurance Co.

filed: July 28, 1992.

ALAN TRUJILLO, PLAINTIFF-APPELLEE,
v.
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the District of Arizona. D.C. No. CV 89-0663-TUC-ACM. Alfredo C. Marquez, District Judge, Presiding.

Before: Goodwin, Fletcher, and T.g. Nelson, Circuit Judges.

MEMORANDUM

State Farm Mutual Automobile Insurance Company (State Farm) appeals a judgment on a jury verdict in this diversity action for bad faith failure to settle a claim within the policy limits. We affirm.

In November 1987 Daniel Thomas's car collided with a motorcycle ridden by Alan Trujillo. Trujillo was severely injured and sued Thomas in state court. Lengthy, and ultimately unsuccessful, settlement negotiations ensued. Trujillo eventually won a $1,720,829.89 judgment following a bench trial. Thomas died shortly after trial, and his widow assigned Trujillo all her rights arising out of the insurance contract with State Farm in exchange for Trujillo's promise not to execute the state court judgment against her personal assets.

Trujillo then sued State Farm in state court alleging that State Farm had breached its duty of good faith and fair dealing to the Thomases by refusing to settle Trujillo's bodily injury claim within the policy limits of $25,000 and thereby exposing the Thomases to massive liability. State Farm removed the case to federal district court on diversity grounds. The case was tried to a jury in March 1991, and Trujillo won a judgment in the amount of $1,720,829.89 plus interest and costs. State Farm timely appeals.

This case, as is typical of such cases, is essentially factual. Arizona law allows a tort victim plaintiff, following a verdict for damages in excess of the tortfeasor's insurance coverage, to enter into a covenant with the defendant not to execute upon the judgment in exchange for the defendant's assignment of his or her rights against the liability insurance carrier. This assignment transfers from the insured to the victim the right to sue the insurer for damages for wrongful failure to settle the case within the policy limits. See, e.g., Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256, 792 P.2d 719 (Ariz. 1990).

In this action by the assignee, the jury determined that bureaucratic bungling by the insurer reached the level of tortious "bad faith" necessary to erase, for all practical purposes, the policy limits. The economic incentives for choosing the correct litigation and settlement strategy in these cases have created an art form in which highly skilled specialists on both sides play for substantial sums. It is accordingly somewhat unusual when an insurer fails to settle a high exposure "bad injuries" case within the relatively low limits of an automobile liability insurance policy. Here the plaintiff, armed with evidence of mismanagement by the insurer's claims department, proved to the jury that the company did not carefully consider the interests of its insured, but instead took unreasonable chances in haggling over nickels and dimes under a $25,000 policy. The jury then awarded the accident victim -- the assignee of the insured -- essentially the same award for "failure to settle" that the original trial jury awarded for injuries in the tort case.

A. Motion for Directed Verdict and JNOV

In diversity cases, we apply federal procedural law in reviewing a grant or denial of a motion for directed verdict. Miller v. Republic Nat'l Life Ins. Co., 789 F.2d 1336, 1340 (9th Cir. 1986). We must determine whether, viewing the evidence in the light most favorable to the nonmoving party, and drawing all reasonable inferences therefrom, "the evidence permits only one reasonable Conclusion as to the verdict." Peterson v. Kennedy, 771 F.2d 1244, 1256 (9th Cir. 1985), cert. denied, 475 U.S. 1122 (1986); accord Air-Sea Forwarders, Inc. v. Air Asia Co., 880 F.2d 176, 181 (9th Cir. 1989) (review of JNOV), cert. denied, 493 U.S. 1058 (1990).

1. Settlement

State Farm's principal defense was that it in fact had settled the case and had met the demands of the plaintiff. On appeal, State Farm argues that the district court erred in denying its motions for a directed verdict and for JNOV on these grounds.

The district court did not err. There was abundant evidence that State Farm and Trujillo in fact had not reached a settlement agreement. The evidence indicates that during the course of settlement negotiations State Farm repeatedly failed to tender checks in the correct amount or payable to the proper parties and failed effectively to accept or respond to settlement offers by Trujillo.

State Farm's central contention is that it accepted Trujillo's offer to settle his bodily injury claim on December 8, 1987. State Farm's claims adjuster, Robert Garcia, testified that on December 7, 1987, he received a letter from Trujillo's lawyer, Thomas Cotter, which stated: "consider this my client's demand for policy limits." According to Garcia, he accepted this offer during a telephone conversation with Cotter the next day. On December 15, Garcia sent Cotter a written confirmation along with a general release form that would have surrendered both Trujillo's bodily injury and property damage claims. Prior to December 7, however, the settlement negotiations had concerned only Trujillo's bodily injury claim; the property damage claim for Trujillo's totaled motorcycle had not yet been negotiated.

In view of this divergence, we cannot say that as a matter of law a valid contract was formed. A reasonable jury might construe the apparent discrepancies among Cotter's December 7 offer, Garcia's December 8 oral acceptance, and Garcia's December 15 written confirmation as evidence of mutual mistake, a rejection and counteroffer, or an acceptance followed by anticipatory breach. See Hill-Shafer Partnership v. Chilson Family Trust, 165 Ariz. 469, 799 P.2d 810, 814 (Ariz. 1990) ("Before a binding contract is formed, the parties must mutually consent to all material terms."); Restatement (Second) of Contracts § 59 (1981) ("mirror image" rule); United Cal. Bank v. Prudential Ins. Co., 140 Ariz. 238, 681 P.2d 390, 429 (Ariz. Ct. App. 1983) ...


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