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June 13, 1975

Britta Randall TANNERFORS, Plaintiff,

The opinion of the court was delivered by: STERN

 This is a diversity action. Plaintiff Britta Randall Tannerfors, *fn1" a Swedish national, brought suit on August 24, 1970 against American Fidelity Fire Insurance Company *fn2" (American Fidelity), a New York corporation, as the alleged third-party beneficiary of an insurance contract between American Fidelity and its insured, George Bray, for its alleged failure to act in good faith in discharging its contractual obligations to Bray in the negotiation, settlement, defense and disposition of a personal injury claim made by the plaintiff against Bray, arising out of an automobile accident.

 On May 16, 1964, the date of the accident, Bray had in force an insurance contract with American Fidelity which provided in part:

With respect to such insurance as is afforded by this policy for bodily injury and for property damage liability, the company shall:
(a) defend any suit against the insured alleging such injury, sickness, disease or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; but the company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient . . . .

 The limits of the insurance policy were $10,000.00 for injury to one person arising from an accident and $20,000.00 for all injuries arising from any one accident. (N.T. 1.12-1.14)

 The sequence of relevant events began with a catastrophic automobile accident which caused several serious personal injuries and one death. On May 16, 1964, a vehicle operated by Bray crashed into the rear of another automobile operated by Raymond Berchtenbreiter. The impact was so severe that Berchtenbreiter's vehicle, as part of a chain reaction, struck an auto operated by Harry Glahn. At the time of the collision, both the Berchtenbreiter and Glahn vehicles were stationary at a red traffic light. Berchtenbreiter died from his injuries, Tannerfors, a Berchtenbreiter passenger, was severely injured, and a third passenger in the Berchtenbreiter auto, Daniel Gernant, sustained relatively minor injuries. Glahn and his passenger, Frances Cooper, also received minor injuries. The Tannerfors injuries, which form the basis for this suit, were immediately known by American Fidelity to be grave: partial paraplegia of the lower limbs. (P-1-a)

 In August 1964 a suit was instituted in the Superior Court of Bergen County, New Jersey, by Charles Rodgers, an attorney representing all the occupants of the Berchtenbreiter automobile, Tannerfors, Gernant and the administrator of the estate of Berchtenbreiter, against George Bray, Harry Glahn and the Director of Motor Vehicles as representative of the unknown driver of an abandoned automobile found near the scene of the accident. Glahn cross-claimed against Bray and counterclaimed against Berchtenbreiter's estate. A second suit was instituted against Bray by Frances Cooper, the injured passenger in the Glahn automobile.

 On June 8, 1966, the consolidated suits came to trial before a jury on the issue of liability alone. At the close of all the evidence pertaining to liability, the court granted Glahn's motions for involuntary dismissals with prejudice of the claims of plaintiffs Gernant, Tannerfors and Berchtenbreiter against Glahn, and the motion of Berchtenbreiter's administrator for an involuntary dismissal of the claims against him by Frances Cooper and counterclaimant Glahn.

 The jury thereafter returned a verdict in favor of Gernant, Tannerfors, Berchtenbreiter and Cooper on their claims and in favor of Glahn on his cross-claim, all against the defendant George Bray, and returned a verdict of no cause for action against the Director of Motor Vehicles and against the plaintiffs and Bray on his cross-claim. The jury thus found Bray to be the sole party liable in the consolidated action.

 The parties thereafter agreed to proceed with the trial on the remaining issue of damages for personal injury before the court sitting without a jury. The amounts of property damage, the only remaining issue, had been stipulated by the parties.

 Based upon the evidence presented, the court entered verdicts on June 29, 1966, in favor of Gernant in the sum of $9,000.00, in favor of Berchtenbreiter's administrator in the sum of $10,000.00 plus the stipulated property damage, in favor of Frances Cooper in the sum of $500.00, in favor of Harry Glahn in the sum of $500.00 plus the stipulated property damage, and in favor of Tannerfors in the sum of $75,000.00, all against the defendant George Bray. (P-1-v)

 Because the insurance proceeds under the personal injury provision of Bray's policy were substantially below the sum of the individual judgments, an apportionment was made among the judgment claimants on a pro rata basis. (Tr. 2.134) On the personal injury judgments, Berchtenbreiter's administrator received $5,000.00 and Gernant $4,500.00; Glahn and Cooper's combined share was $500.00. Tannerfors, whose personal injury judgment greatly overshadowed the combined judgments of the other claimants, received $10,000.00, the maximum amount payable to any single claimant under the personal injury clause of Bray's insurance policy. (Tr. 4.64-4.65)

 Further satisfaction of Tannerfors' judgment against Bray was not forthcoming, despite her futile desire personally to pursue him in Florida (Tr. 4.91), until August 21, 1971, when Bray assigned all rights that he had against American Fidelity under the insurance policy arising out of Tannerfors' New Jersey accident lawsuit in exchange for satisfaction of Tannerfors' judgment presently outstanding against him. Following this assignment, leave to file an amendment to the pleadings was sought by Tannerfors and granted by the Court, permitting Tannerfors to assert Bray's claims that American Fidelity had breached its fiduciary duty to him and that it should be held responsible for the excess judgment. *fn3"

 This case came to trial in the wake of the recent decision of the New Jersey Supreme Court *fn4" in Rova Farms v. Investors Insurance Co., 65 N.J. 474, 323 A.2d 495 (1974). Rova Farms formulated the strict fiduciary duties which insurers must bear when undertaking their contractual obligations to defend their insured against claims by a third party.

 The Supreme Court's recognition of the inherent conflict of interest between an insurance company and its insured when both face a viable claim by an injured third party, potentially exceeding the policy limits, was the predicate for compelling the insurance company, which has contractually reserved full control of the settlement of such claims under the policy, to act in good faith as an agent of the insured in attempting to arrange a possible settlement.

Even those cases in other jurisdictions which have found in favor of the insurance company on the basis that no settlement demand was made by the injured party, generally suggest that the evidence did not indicate that such a settlement could have been effected in any event. [citations omitted]
* * *
We, too, hold that an insurer, having contractually restricted the independent negotiating power of its insured, has a positive fiduciary duty to take the initiative and attempt to negotiate a settlement within the policy coverage. Any doubt as to the existence of an opportunity to settle within the face amount of the coverage or as to the ability and willingness of the insured to pay any excess required for settlement must be resolved in favor of the insured unless the insurer, by some affirmative evidence, demonstrates there was not only no realistic possibility of settlement within policy limits, but also that the insured would not have contributed to whatever settlement figure above that sum might have been available.

 Rova Farms, supra, at 493-496, 323 A.2d at 505-507.

 It is against this legal standard that the defendant's conduct in respect to this accident is to be judged.

 Within a day or two of the occurrence of the accident, months before the institution of suit against its insured, the American Fidelity claim examiner in charge of the file, Thomas Packert, assigned Phillip Klieger, an independent adjuster, to investigate the accident. (D-5, Tr. 2.22)

 The next day, May 17, 1964, Klieger interviewed and obtained Bray's version of the accident embodied in a signed statement. Klieger also inspected Bray's insurance policy. *fn5" Such interviews with the other drivers and occupants of the accident automobiles as were feasible were also undertaken by Klieger. Klieger incorporated the results of his brief investigation in his report to American Fidelity, dated May 18, 1964. (D-5) The May 18th report was accompanied by a New Jersey newspaper clipping describing the accident. The newspaper clipping (D-4), Klieger wrote in his report, "has a photograph of a mass of steel which cannot be discernible," referring to the death car driven by Berchtenbreiter. (D-5, p. 2)

 On May 18, 1964, National Claims Service was substituted for Klieger as the investigator for American Fidelity. William Vogel, an employee of National Claims Service, made his first report on May 22, 1964. This report (P-1-o) dealt largely with the results of inspection of the physical damage to the accidented cars. Vogel enclosed photos of all the cars, then located in a junkyard. Vogel's report also stated that his attempts to interview the hospitalized surviving passengers of the Berchtenbreiter auto were thwarted because of their physical conditions. Vogel did interview Bray, but was not comfortable with Bray's explanation of the accident. (P-1-o, p. 1)

 Both investigative reports and the accompanying exhibits brought grim news to the defendant. Not only did it appear that its insured had caused the accident, but the resulting claims for injuries and death, let alone property loss, clearly exceeded the policy limits in substantial amounts.

 The corporate defendant's immediate reaction to its unhappy position was to attempt to sidestep all liability by demonstrating that its assured, Bray, had obtained the policy by fraud. Seizing on the insurance policy information in the Klieger report, American Fidelity retained a Florida attorney to evaluate the legal ramifications of a declaratory judgment action to invalidate Bray's insurance policy. *fn6" Although the exact date of the engagement of the Florida counsel is unknown, a letter opinion was sent to American Fidelity on June 12, 1964, which proposed solutions to the legal problems presented by the defendant *fn7" to Florida counsel.

 Bray was not notified at the time of these preliminary steps taken by American Fidelity to disclaim liability under his insurance policy. (Tr. 1.81) When Bray did inquire of Baker & Co., the agent of American Fidelity who wrote his insurance policy, concerning the validity of his policy, Baker apparently replied that "his policy was in good standing." (P-1-a, p. 3)

 These communications were summarized in Packert's memo to Harold Levy, American Fidelity's claims manager. (P-1-a; Tr. 1.49)

 The tenor of Packert's memo indicates dissatisfaction with the attitude of Baker & Co. and of L. T. Stanley toward disclaiming liability on Bray's policy. As Packert wrote, "Again, it seems to boil down to the fact that our beloved agent, Baker and Company, simply does not care." (P-1-a, p. 3) Packert, himself an attorney, had no difficulty in observing "that liability appears to be probable, to full" at this early date. (P-1-a, p. 1)

 The June 30, 1964 memo by Packert concludes with two recommendations designed to insulate American Fidelity from any liability:

In my opinion we have two alternatives open to us by way of future handling of this file.
The first would be, to disclaim completely on the basis that there was no policy ab initio due to either fraud on the part of the broker and the insured together, or because of the material breach of the contract on the part of the insured in failing to state his speeding violation on his application. If we followed this course of action we would, of course, wipe our hands completely of the matter, not appearing in any suit arising out of the accident. If judgment were rendered against the insured, and it certainly appears that that would be the case, we would, of course, have to defend any action that the insured would institute against us.
It is my belief that this would be an extremely dangerous course to follow. Our chances of defending an action by the insured against us on a basis of fraud or material breach, are uncertain to say the least. I would not say that our chances would be good at trial.
It is my recommendation that we follow the second alternative and that is, handle the file as if there is a valid insurance in effect with no defects. At the same time, I would notify the broker to get in touch with his Errors and Omissions carrier for a possible action. It is well established that a principal can bring an action against one of its agents for the negligent acts of its agents. It is my firm belief that if Mr. Stanley was not guilty of fraud he most certainly was negligent in his soliciting this policy from the insured. If he was not on actual notice of the fact that the insured resided, or had resided in New Jersey for the past three years, I don't think it would be too difficult to prove to a jury that he should have known that the insured resided in New Jersey. The slightest bit of investigation on his part would have revealed this fact to him.
I therefore think that he would be charged with constructive notice of the fact that our insured was not a resident of Florida.
I would suggest that no matter what course of action is decided upon that we cancel the insured's policy immediately. We would certainly look ridiculous in Court stating adamantly that had we known . . . . we never would have written the risk if the plaintiff could show that we did not cancel the policy when we were, in fact, put on notice.

 (P-1-a, pp. 4-5) (Emphasis added)

 Packert's memo of June 30, 1964 was answered by memo of July 7, 1964 (P-1-b) by Harold Levy, Packert's superior. Levy therein proposed a third alternative to extricate American Fidelity -- the commencement of a declaratory judgment action by the insurance company against Bray, for the purpose of having the policy declared invalid ab initio, thus relieving the company of all financial responsibility. Levy indicated a desire, however, to secure the opinion of New Jersey counsel whether a declaratory judgment action "would be a wise move."

 On July 29, 1964, Packert telephonically retained, on behalf of American Fidelity, the firm of Kristeller, Zucker, Lowenstein and Cohen, of Newark, New Jersey. By letter of July 30, 1964, American Fidelity transferred its file on the Bray accident to the New Jersey law firm to facilitate the declaratory judgment action against Bray. (P-1-c) Milton Gurny, Esquire, an associate of the firm, was assigned to the case. (Tr. 2.68)

 Packert testified regarding the purpose of obtaining New Jersey counsel:

Q. From examining that letter [P-1-c], sir, can you tell us what the purpose was in forwarding this file over to Mr. Gurny's law offices?
A. Yes. We sent the file over to Mr. Gurny for a review with the thought in mind of instituting a declaratory action to determine the validity of the insurance policy.
Q. Would this declaratory action have been against the insured, Mr. George Bray?
A. Yes. You mean against him?
Q. Yes.
A. Yes, it would have.

 (Tr. 1.73) (Emphasis added)

 At the August 11th meeting, attended by Gurny, Bray and Giegold, two topics were discussed. First, Gurny questioned Bray about the facts and circumstances of the accident. Gurny considered this an attorney-client conversation, with Bray the client and Gurny acting as Bray's lawyer. (Tr. 2.80-2.81) No stenographic minutes were taken of this portion of the meeting. The second portion of the meeting concerned the possibility of American Fidelity's filing a declaratory judgment action against Bray. Bray was interrogated on this subject under oath by Gurny before a shorthand reporter. *fn8" Gurny later testified at trial that during this second conversation he was not acting as Bray's attorney, but as American Fidelity's attorney, investigating to determine if a declaratory judgment action could be brought on behalf of American against Bray. (Tr. 2.69, 2.83) Gurny also procured a non-waiver agreement from Bray at the August 11th meeting (P-1-g), which permitted American Fidelity to proceed with the defense of the accident suit without waiving its right to disclaim liability arising under the Bray's insurance policy. Although no declaratory judgment action was instituted against Bray, at no time did the company execute a rescission of the non-waiver agreement. (Tr. 1.87) The company did not advise Bray of the purpose of the August 11th meeting (Tr. 1.75), nor of his right to retain personal counsel (Tr. 1.78), nor of the significance of a non-waiver agreement. (Tr. 1.85) Attorney Gurny likewise did not advise Bray that he had a right to retain personal counsel in the accident litigation. (Tr. 2.70) In fact, at no time did he advise Bray of his right to retain counsel to protect his personal interests. (Tr. 2.70, 2.88) Nor did he tell Bray that he was not Bray's attorney for purposes of the "bifurcated" meeting. (Tr. 2.70) He explained the meeting to Bray as follows:

I advised him that the purpose of the meeting was to determine whether there was insurance coverage.

 (Tr. 2.69)

 However, Gurny never advised Bray that the company was contemplating instituting a lawsuit against him (Tr. 2.69, 3.53), and the colloquy between attorney Gurny and Mr. Bray, at the conclusion of the stenographic statement (P-1-e), cannot be said to be reasonably likely to apprise a layman of the potential dynamics of the situation:

Q. Now, you understand that the reason I've asked you these questions is because there is some doubt concerning your insurance, and particularly L. T. Stanley. Do you understand that?
A. Yes.
Q. And American Fidelity Fire Insurance Company is conducting an investigation right now, and with Stanley to get this matter straightened out, right?

 Understandably, Bray believed that the investigation was one being conducted by the insurance company of its agent, L. T. Stanley. (Tr. 3.52-3.54)

 Gurny communicated the results of his declaratory judgment investigation to American Fidelity in his letter of August 13, 1964 (P-1-d), in which he concluded that a declaratory judgment against Bray would not be productive. This letter terminated that strategy by the defendant which, up to that moment and unknown to its assured, had been devoting the major part of its efforts in regard to the accident to an attempt to disclaim responsibility for the conduct of the assured.

 Subsequently, and before November of 1966, Bray moved to Florida. (Tr. 3.135)

 Meanwhile, the civil suit Gernant, et al. v. Bray, et al., moved on with Gurny appearing as Bray's legal representative. By this time, as noted earlier, American Fidelity had abandoned its efforts to jettison its assured and had resigned itself to defend Bray without any formal reservation, consistent with its contractual obligation under the policy.

 The Gernant-Bray suit flowed within the normal channels of civil litigation. Interrogatories were propounded by each side. Medical reports were ...

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