Stetler v. Fosha (809 F. Supp. 1409, 1992)

FINDINGS, CONCLUSIONS OPINION, ORDER AND JUDGMENT

WOOLEY, United States Magistrate Judge.

The matter before the Court is a garnishment proceeding against Farmers Insurance Company, Inc., following a trial verdict against the insured, Teresa Hagedorn Fosha (Fosha), and the entry of judgment in excess of the policy coverage limits and in favor of plaintiff, Kevin L. Stetler (Stetler). The garnishment arises from a personal injury claim resulting from a motorcycle-automobile collision in Manhattan, Kansas on October 5, 1979. Both parties have signed, pursuant to 28 U.S.C. § 636(c), a written consent to have the United States Magistrate Judge consider the record, the parties’ respective briefs and arguments, and make findings of fact, conclusions of law and enter judgment. (Dkts. # 105 and 106). Jurisdiction of the action in federal court is premised on diversity of citizenship, and amount in controversy under 28 U.S.C. § 1332(a)(1).

Plaintiff Stetler is represented by Jerry M. Ward of Ward & Berscheidt, Great Bend, Kansas. Garnishee, Farmers Insurance Company (Farmers), is represented by John A. Bausch of Benfer, Bausch & Blumreich, Topeka, Kansas. Defendant Teresa Hagedorn Fosha was represented before and during the two trials of this case by Clarence L. King, Jr. and Robert M. Adrian, of King, Adrian, King and Brown, Salina, Kansas. During 1981, Fosha was also represented by David S. Knudson, while Mr. Knudson was associated with the King law firm.

PREFACE:

This excess judgment garnishment action may not be unique, but it is unlike most of the reported cases on the issues of bad faith and negligence. Liability of one party to the other is not clear-cut. The liability issue is closer than any the court can recall in similar cases in its 36 years as a lawyer and judge. The case has been twice tried to a jury — the first time in the District Court of Riley County, Kansas at Manhattan, and the second time in the Federal District Court in Kansas at Topeka. The jury in the first trial found the majority of fault (70%) was that of the plaintiff motorcycle driver. In the second trial, the federal court jury found 51% of the fault rested with the defendant driver of the automobile and fixed total damages at $275,000.00. Based on the 49/51% fault ratio, the court entered judgment for plaintiff for $140,250.00. Defendant’s liability policy had a limit of $25,000.00 for any one plaintiff. Farmers has paid that amount to the clerk of the court and subsequently it was paid to plaintiff’s attorney. Plaintiff seeks to hold Farmers liable for the excess of $115,250.00.

What remains for this court to decide is whether Farmers should be held liable for the $115,250.00 in excess of the policy limits and, if that question is decided in the affirmative, whether plaintiff is entitled to reasonable attorney’s fees, and the amount of such fees.

A finding of bad faith or negligence in defense of the action results in liability on the part of the insurance carrier for the entire judgment; an opposite finding would result in judgment against the driver of the automobile, (Fosha), for the excess over $25,000.00.

STATEMENT OF FACTS:

The collision occurred on October 5,1979, at approximately 4:17 in the afternoon, on Denison Avenue in Manhattan, Kansas. Denison Avenue is a wide, two lane, two way, north-south street. At the area of the collision, Denison had a posted 30 m.p.h. speed limit, and was marked by a double yellow line indicating no passing.

Fosha was driving a 1976 Pontiac Ventura accompanied by her younger sister. Fosha, headed east, exited what was known as West Stadium Parking Lot on the Kansas State University campus, and was turning left (north) onto Denison from the driveway which is roughly 100 ft. south of the intersection of Denison and Hunting Avenue. Hunting is the first east-west street crossing Denison at right angles north of the accident scene.

Stetler’s southbound motorcycle struck Fosha’s car in the extreme rear quarter panel on the driver’s side, tearing the rear bumper loose on that side of the car. The motorcycle and Stetler then veered away from the car, and skidded some distance down the roadway before coming to rest. Stetler’s injuries were severe, resulting in the amputation of his left leg below the knee a few days after the collision. Fosha and her sister were uninjured. (Findings of Fact Nos. 1-7)

A Riley County police officer promptly arrived on the scene and instituted traffic control measures, emergency services and accident investigation. In the accident report the officer fixed the point of impact one to six inches east of the center line, in the northbound lane of traffic which Fosha was entering. The point of impact was identified by the position of a fluid spill which came from the hydraulic cylinder of Fosha’s damaged rear bumper. There were no skid marks or other debris in the roadway. (Fof nos. 8 and 9)

The report contains Fosha’s statement that at the time of the collision she was northbound, having completed her turn out of the parking lot, and that her rear bumper was “adjacent to the double yellow line.” An automobile driven by Samuel Owen, was immediately behind Stetler’s motorcycle. Owen stated he witnessed the collision and indicated his belief that Fosha was southbound in front of Stetler, and that impact was in the southbound lane, on the right rear, rather than left rear, of Fosha’s car. Michael Richard, a motorist following Owen, indicated that Stetler was southbound in the northbound lane of traffic at the point of impact. Statements of witnesses, and Stetler himself, indicated that immediately prior to the collision, Stetler was driving in excess of the speed limit, had passed two cars, the first on the left hand side and the second on the right, and was inattentive. (Fof no. 10, 13, 15 and 16)

At the time of the collision, Fosha was insured by Farmers in a policy issued to Lewis Hagedorn, her father. The policy provided for $25,000.00 maximum bodily injury coverage for any one injured person. (Fof no. 11)

Farmers assigned investigation of the incident to Special Claims Representative Richard Mansfield. On October 9, 1979, Mansfield obtained a copy of the police report and visited the scene of the collision. Statements were obtained from Stetler, Fosha, Owen, Michael Richard, and two pedestrians at the scene, Tami Kater and David Zidek. (Fof nos. 12 and 13)

In his statement, Stetler admitted to passing Owen, whom he knew, at a speed of approximately 35-40 m.p.h., and looking away from the front. When he looked back Fosha’s car was in front of him in his lane. Fosha stated she drove to the parking lot exit to Denison, looked both directions, and saw a southbound bicycle approaching her, followed by several cars. Estimating that she had plenty of time to pull out of the parking lot, she did so, and had completed her turn into the northbound lane when the motorcycle appeared and hit her car. (Fof nos. 12, 13 and 14)

Owen’s statement was that Stetler was traveling between 55 and 60 m.p.h. at the time Stetler passed him on the right and he states that Stetler had looked away briefly before the impact. Owen stated he thought Fosha’s car had turned right onto Denison, and been hit on the right rear side, rather than the left. Owen was definite in placing the point of impact in the southbound lane of Denison. (Fof no. 15)

Richard estimated Stetler was going 40-45 m.p.h. at the time Stetler passed him on the left hand side. He did not notice the motorcycle again until the collision, which he believed occurred on the exact center line of the roadway. Richard never noticed Fosha’s car until the collision. (Fof no. 16)

Zidek was walking on the east side of Denison Avenue. Zidek noticed Stetler passing a car on the passenger side, and traveling at approximately 35-40 m.p.h. Zidek was walking away from the scene at the time of impact, and turned at the sound of the collision. Zidek stated he did not see the collision and did not know the location of either the motorcycle or the car when they collided. (Fof no. 17)

Kater was standing on the east side of Denison at a crosswalk roughly opposite the approximate point of impact. She watched Fosha pull out, but never saw the motorcycle until the collision. She felt Fosha’s car had completed its turn and was completely on the east side of the center line at the time of impact. (Fof no. 18)

On the basis of his investigation, Mansfield advised Charles Snyder, Branch Claims Manager for Farmers, that “we should not make any [settlement] offer as I do not feel [Fosha] is near 50% negligent and [Stetler] is over 50% negligent.” Mansfield filed his official investigative report on November 30, 1979. In that report Mansfield listed Stetler as a potential claimant, due to the serious injury resulting in amputation, and also for damage to the motorcycle. Mansfield summarized the statements of the witnesses, included the police report, photographs and statements. Mansfield’s proposed disposition stated:

Investigation shows there is little or negligence [sic] by ‘A’ driver [Fosha] in this accident. Although we have no testimony as to the speed of motorcycle at the time of impact, witnesses will testify that he was definitely speeding prior to impact and ‘B’ driver [Stetler] admits that he was not watching the road ahead prior to impact, therefore it is felt that ‘B’ driver’s negligence definitely exceeds 50% and that any claim for bodily injury could be successfully defended. No formal claim for bodily injury has been made at this time.

(Fof nos. 19 and 20)

On December 1, 1979, Snyder sent a memorandum to Mansfield in which he asked Mansfield if he could "... please call ‘B's’ parents and explain our position of non-liability? Then close your file and we will wait for suit.” Around December 13, Mansfield replied “I have advised ‘B[’s]’ parents of our position of no liability. They apparently have no insurance to cover the medical bills and I have no doubt they will pursue.” (Fof no. 21)

Snyder submitted a summary report to Paul Layman, Jr., Regional Liability Claims Manager, on March 11, 1980. Snyder stated:

Our investigation indicates that our insured had completed a left-hand turn and was in the northbound lane of traffic at the point of impact. It is apparent through witness statements and the police report that the ‘B’ driver was at least 51% comparative negligent in his own behalf.

We feel this is a defensible case and we should not, at this time, make any offer of settlement in regard to same.

It is our opinion through the investigation we have developed that this would be one of contributory negligence in equal amounts on both ‘B’ and ‘A’. Also, our investigation would intend to show that the claimant would be more negligent than the insured due to his erratic driving and the fact that our insured was in the north lane of travel past the center line at the point of impact as substantiated by the witness statement.

[W]e should stand firm on our denial of liability in this matter. We are faced with policy limits of 25/50/10, which we feel would probably not compensate the claimant for the severe injury that he has sustained. I feel we have negotiated in good faith and made our decision known to the claimant in reasonable time and feel that any ensuing litigation should be defended.

(Fof no. 22)

Layman’s March 14 response to Snyder agreed that the investigation had been “extensive and timely.” However, because the injury was so severe and the coverage so low, Layman requested the file be referred to counsel for preliminary review and recommendations. Layman indicated a concern for the best interests of the insured, and the need to avoid placing the company in the position of having acted in bad faith. (Fof no. 23)

Snyder submitted the complete file to the law firm of King, Stokes, Knudson & Nitz of Salina, Kansas, on April 23, 1980. After reviewing the file, Clarence King, Jr. informed Charles Snyder by letter dated May 5, 1980 of his opinion that more than 50% of the liability rested with the motorcycle operator. King based his opinion on the fact that Stetler was speeding, and was passing at the time of the collision. King went on to state:

... I am assuming that our insured was unable to see the plaintiff’s motorcycle at the time [she] pulled out of the parking lot.

This is of course a very dangerous type of situation, mainly because of the very serious injury to a healthy young man, and I suspect that some of the evaluation may rest on the ability of the witnesses to convey the liability picture.

However, on paper, it certainly appears that the plaintiff was more than 50% the fault of this accident. Because of the very serious nature of this claim, you may wish to consider obtaining sworn court reporter statements from the various witnesses at this time.

(Fof no. 24-32)

Ward officially contacted Farmers on August 7, 1980, informing Farmers that his firm represented Stetler in regard to the collision. Stetler requested notice within ten days if Farmers was willing to discuss settlement of Stetler’s claim. Charles Snyder responded on August 20, 1980. Snyder stated that Farmers’ position as to liability after investigation of the accident and review of the file by counsel was that Stetler’s negligence would bar any recovery in Kansas. (Fof nos. 35 and 36)

Ward filed suit on behalf of Stetler in state district court in Riley County, Kansas on January 13, 1981. Thereafter, Farmers submitted the file to King, Stokes, Knudson & Nitz for defense of the action. The case was initially handled by David Knudson and Robert Adrian. (Fof nos. 37 and 38)

Farmers sent a letter to Lewis Hagedorn and Teresa Hagedorn Fosha on January 29, 1981, to inform them of the suit. The letter stated in part:

This Complaint has been referred to KING, STOKES, KNUDSON & NITZ, P.O. Box 942, 116 W. Iron Ave., Salina, KS 67401 who will enter a defense and protect your interest.

There is no monetary limit to the plaintiff’s demand. It is possible that a judgment could be secured in excess of the limits of your insurance policy. You are at liberty, at your own expense, to engage legal counsel to associate with these attorneys.

Please be assured, that whether or not you engage your own counsel, defense counsel will defend this action without cost to you in accordance with the terms of the policy.

(Fof no. 39)

Adrian was familiar with excess situations and potential conflicts between the insured and the insurer. (Fof no. 48)

On February 24,1981, Knudson and Robert Adrian met with Teresa Hagedorn Fosha and possibly Lewis Hagedorn as well. According to a memo placed in the file by Knudson, during the meeting the general status of the case was reviewed; they “discussed the excess question’ ” and reviewed interrogatories submitted by the plaintiff. (Fof nos. 40-47, 55 and 56)

Knudson recalls that during the meeting Fosha and her father were concerned “about liability exposure to her based upon the excess letter that had been received____ And so, they naturally had some questions about the excess letter and we explained to them that it appeared to us from a preliminary investigation, tentatively, that Mr. Stetler was at fault in the accident____” However, at the meeting Fosha and Lewis Hagedorn indicated the case should be defended rather than settled, due to their belief that Teresa was not at fault in causing the collision. (Fof nos. 50, 52 and 57)

Adrian’s memory of the February 24, 1981 meeting is that there was discussion regarding the $25,000 policy limit, and that the claim was well above that limit. Discussion also included the idea that Fosha would be personally liable for any judgment in excess of the policy limits, and that she might want to seek her own attorney. Adrian has no recollection whether Fosha was advised at that time that she had a right to make a demand on the company to settle for policy limits. (Fof nos. 49 and 54)

As the parties continued preparation for trial, the depositions of Stetler and Fosha were taken, and Adrian obtained sworn statements from Kater, Owen, Richard and Zidek. (Fof no. 62)

The sworn testimony of the witnesses basically enlarged on their previous statements, with a few significant differences. Witness Tami Kater stated that although she believed Fosha’s car was entirely in the northbound lane at the point of impact, she could not be certain of the car’s position. (Fof nos. 65 and 71)

Zidek was uncertain whether Fosha’s car was over the centerline, although the “majority” of the car was over the centerline after the collision while the motorcycle and driver were still in the air. (Fof no. 64)

Owen’s sworn testimony had Stetler’s speed down to between 45-50, and Fosha as practically stopped. Furthermore, Owen no longer insisted Fosha had been going southbound, as in his previous unsworn statements. He remained adamant about actually witnessing the impact of the vehicles. He now stated Fosha was headed almost due east, and remained well into the southbound lane of traffic at the time of impact. (Fof nos. 63, 69, 70, 75 and 76)

Richard repeated his earlier statement that he did not see the motorcycle from the time it passed his car until the driver was flying off of the motorcycle after impact. Richard also stated that he had no recollection of the position of the car and motorcycle in relation to the centerline of the roadway independent from the statement to police he made at the time. (Fof no. 66)

In Stetler’s deposition, taken by Knudson on April 29, 1981, Stetler again stated he passed Owen’s vehicle on Owen’s right and waived at him as he passed. Stetler then believed there were two southbound lanes at that particular point on Denison and that the collision occurred on the west side of Denison. (Fof no. 60)

In Fosha’s deposition, taken by Ward on April 29,1981, Fosha described the collision as she had in her earlier statement to Mansfield and added that she estimated the cars coming toward her from the north were approximately a quarter of a block north of the intersection (of Denison and Hunting) when she pulled out; that after pulling out (onto Denison) she caught a quick glimpse of a man on a motorcycle passing her driver’s side window and then there was an impact on the rear of her car. She again mentioned the bicycle being in front of the southbound cars as they approached and remembered seeing the bicycle and rider briefly at the scene of the collision after the impact. (Fof no. 61)

Knudson reported the findings of the ongoing discovery regarding Stetler’s claim to Snyder by letter dated June 11, 1981. Knudson reported summaries of the witnesses’ statements to Snyder, and updated him as to the issue of liability as it appeared to Knudson at that time:

As you know, liability is questionable and investigation to date supports a conclusion that plaintiff was more than 50% responsible. The eye witnesses state plaintiff was speeding, inattentive, and right on or over the center line at the time of the accident.

It will be necessary for us to take the deposition of the police officer who investigated the accident and pin him down as to his diagram. Once this is completed it may be necessary for us to hire an accident reconstructionist and have him prepare some type of report and/or exhibit regarding the positions of the automobile and the motorcycle at the time of the impact and the speed of the vehicles at the time of collision. From this we should be able to formulate a definite opinion as to fault. As you will recall, the police officer’s report had the accident occurring very near the center line of the road. It is possible that a jury would conclude that defendant should have seen the motorcycle and yielded the right of way. Thus we are quite concerned with the actual point of impact.

(Fof nos. 67 and 68)

The deposition of the police officer who investigated the collision and prepared the accident diagram, Steve Schwarm, was taken on September 1, 1981. Counsel for Farmers and Fosha did not obtain an opinion from a collision reconstruction expert until after plaintiff’s expert, Ronald Wells, placed the point of impact well into the southbound lane of traffic occupied by Stetler. (Fof no. 81) Farmers expert, Gary Thompson, reported in a letter to Robert Adrian dated April 27, 1982, that it was his opinion that the impact occurred approximately three feet east of the center-line. (Fof nos. 82 and 83)

Between June of 1981 and August of 1982 more depositions were taken from witnesses and the accident reconstruction experts. The deposition of Leonard Komarek was taken on November 4, 1981. At the time of the accident Komarek was Stetler’s brother-in-law. Komarek testified regarding a visit he made to the hospital after the accident. He identified Fosha as being present at the hospital, and described overhearing a conversation in which Fosha stated that when she pulled out into the street and saw the motorcycle coming there was no place for her to go so she had stopped. (Fof nos. 73 and 74)

The testimony of Adrian indicates that Fosha was advised prior to the trial in 1983 to obtain outside counsel:

... and I informed her I would anticipate a judgment of $500,000.00 or more, if in fact he was successful. I, on more than one occasion, requested that she go seek her own independent counsel. I informed her that she should take the statements we had previously provided, together with my discussion with her, and if a judgment was rendered in excess of the policy limits it would be extensive, that in all probability that attorney would send a letter to me demanding that I settle within policy limits. That letter was not binding upon me. I still had to exercise my independent judgment. ...

(Fof nos. 79 and 89)

According to Adrian, Fosha asked whether she might be able to go through bankruptcy to avoid the judgment. Adrian’s response was “I will not discuss with you your rights or options. You need to get independent counsel.” (Fof no. 80)

The Stetler-Fosha trial did not begin until February 23, 1983. Prior to the trial (on April 26, 1982), Adrian obtained partial summary judgment holding Stetler was negligent in speeding, which was a contributing cause of the collision. Stetler’s lawyer notified Adrian by letter in early February that it was his intention to seek an excess liability judgement against Farmers for bad faith if the verdict was favorable to Stetler. Stetler’s letter also sought confirmation that neither Adrian or any member of his office had ever solicited a settlement demand or attempted to negotiate a settlement within policy limits. (Fof nos. 85 and 87)

From the time he became supervisor of the file until the time of trial in state court, King had no recollection of any settlement discussions and did not recall ever considering advising Farmers to negotiate with Stetler. King felt the case was defensible. (Fof nos. 90 and 91)

Adrian reported the status of the case to Snyder in a February 15,1983 letter. Adrian discussed the notice from plaintiff’s counsel, and reiterated the position of counsel regarding Stetler’s claims:

This matter is presently set for trial to begin within the next eleven days. In reviewing all the depositions, police report and other pleadings, it is still our position that plaintiff was more than 50% at fault for this accident. Plaintiff has already been found by the court to be negligent as a matter of law in speeding and that this speeding was a proximate cause of this accident. Furthermore, there is no question that plaintiff was passing in a no-passing zone. Plaintiff himself admits that after he passed the car, he was looking off to the side and not watching in front of him. This, coupled with the eyewitnesses’ testimony that places our ear fully in our lane of traffic and our expert’s opinion that places point of impact in our lane of traffic, leads us to the opinion that plaintiff is at fault for his injuries and that defendant, Teresa Hagedorn, should not be responsible for his expenses and damages.

In reviewing all of the documentation, it is my position that even if we had $2,000,000.00 worth of coverage and plaintiff offered to settle this case for $25,000.00, we should not settle with him but proceed to trial.

(Fof nos. 78 and 86)

In the same letter, Adrian provided Snyder with two quotations which Adrian described as the controlling statements of law for Stetler’s potential excess liability claim. The quotations, represented to Snyder as Syllabus 4 and Syllabus 7 of the Kansas Supreme Court opinion in Farmers Insurance Group v. Schropp, 222 Kan. 612, 567 P.2d 1359 (1977), appear in actuality to be headnotes added to the opinion by West Publishing Company, and as such are not part of the official opinion. The first quotation closely paralleled the actual syllabus, and accurately described that point of law. (Fof no. 86)

The second quotation, identified as Syllabus 7 from the Schropp opinion, was misidentified, and did not accurately reflect the law contained in the actual syllabi of the case. Instead, the quotation was a partial description of the key facts which the court had identified in holding Farmers, the appellant in Schropp, guilty of bad faith in failing to reach settlement in that excess liability garnishment proceeding. The quotation emphasized Farmers’s failure to enter settlement negotiations even while knowing the insured was almost certainly at fault for causing the claimant’s injuries. Adrian concluded that because “all indications” were to the effect that Stetler was the “major, if not sole, causal factor for the injuries plaintiff sustained,” he did not believe Farmers could be guilty of bad faith or negligence in denying Stetler's claims. The letter to Snyder represented the final evaluation of liability for the collision that Farmers would receive from King's law firm prior to the trial. (Fof no. 86)

By letter dated February 18, 1983, to Adrian, Stetler, by his lawyer, Ward, offered to settle for policy limits. At that time, Stetler’s medical bills exceeded $22,-000. (Fof nos. 84 and 88) The offer was not accepted.

Trial of the case began on February 23, 1983. King and Adrian went to Manhattan two days before the trial to prepare. King’s first meeting with Fosha was on Monday of the week of trial. (Fof no. 92). As part of the preparation for trial, they discussed the entire case, which included discussion of the “excess problem.” (Fof no. 93). At this meeting King understood Fosha as saying she had consulted with another attorney, Stites. (Fof nos. 104, 107 and 110) King believed Fosha had been advised on several occasions to consult with another attorney, but King never received any calls or requests to examine the Stetler file from any attorney. (Fof nos. 108 and 109) Neither did Adrian. (Fof nos. Ill, 112 and 113) Adrian never was contacted by any attorney representing Lewis Hagedorn. (Fof no. 114)

The 1983 trial in state court began with a statement by plaintiff’s counsel on the record that Stetler was willing to settle the action for $25,000.00, the limits of the policy coverage. (Fof no. 94) Farmers’ Claims Manager was not made aware of the offer until that evening. (Fof no. 95) King, Adrian and Fosha discussed the offer on a bench outside the courtroom. King recalls the conversation:

... and I went over with her again the fact that there had been an offer of settlement for the $25,000, and that she, if she wanted to, I would give her — try to get the Court to give time so she could go talk to John Stites. I was assuming at that point that was her attorney, and talk with him about that offer; and if— again went over; I said, this is the same thing that we discussed yesterday about whether or not you wished to demand the company settle within the policy limits; and because we had gone over not just what would happen, I told her if she went to an attorney — this was before she had gone to John — I had told her if she went to an attorney, probably what would happen is the attorney would look at it, and he would demand that we settle within the policy limits; and at that point in time I would call the company and let them know, and it would be up to the company to make a decision as to whether they were willing to offer the policy limits; and if they didn’t, then if there was an excess judgment, it very well could be the company’s responsibility rather than hers.

(Fof no. 96)

Fosha indicated her desire to go ahead with the trial. (Fof no. 97)

The information given to Fosha by King and Adrian had consistently indicated that the facts favored resolution of the trial in her favor. (Fof nos. 72 and 78) King and Adrian did, however, tell Fosha that she could lose the case, and if that happened she could be liable for the excess judgment. (Fof nos. 101 and 103) Fosha was also aware that the final decision on an offer of the policy limits belonged to Farmers. (Fof no. 97) There is no question that Fosha consistently maintained she was not at fault for the collision, and did not believe Stetler should recover from her on the basis of her fault. (Fof no. 98)

The February 23, 1983 trial concluded two days later with a verdict in favor of Fosha, finding 70% fault on the part of Kevin Stetler, and 30% fault on the part of Teresa Hagedorn Fosha. Under Kansas’s comparative negligence statute, a plaintiff who is equally or more at fault than the defendant cannot recover. Judgment was entered for defendant. (Fof no. 115)

Stetler appealed. On June 14, 1984, the Kansas Court of Appeals reversed and remanded the case to the trial court. Stetler v. Fosha, 9 Kan.App.2d 519, 682 P.2d 682 (1984). The court held that the charge to the jury instructing that Stetler was negligent as a matter of law in speeding and that his negligence was a cause of the collision, was error and was prejudicial to Stetler’s case. The court also found that the grant of summary judgment on that point prior to the trial wrongfully invaded the traditional role of the jury to determine causation in a negligence action. Adrian, on behalf of Fosha, appealed the ruling of the Kansas Court of Appeals to the Kansas Supreme Court, but was denied review on September 6, 1984. (Fof no. 116). Stetler’s claim was thereafter set for a second trial.

Fosha called Adrian on August 29, 1984. The telephone conversation was summarized in Adrian’s memo to the file as follows:

... We then discussed the facts of this case and the potential exposure to her if she should lose. I informed her that there was, in my opinion, a good chance of a $1,000,000 judgment against her if, in fact, the fault was shown to be attributable to her and not to plaintiff. She then discussed whether or not this matter should be settled and I informed her that I thought the facts favored her, however sympathy did, in fact, favor the plaintiff. In any event, I instructed her that if she had any questions regarding whether or not this should be settled, to contact another attorney. She wanted to talk to her parents and other individuals and see what her opinion was regarding settlement, but, that at this time, did not want to inform me either way.

(Fof no. 117)

A number of factors were considered by defense counsel concerning a retrial of the action. Among those were the amount of Stetler’s medical bills which had continued to increase over time due to the need for additional operations and difficulty with his prosthesis. King had been favorably impressed by Stetler’s quality as a witness in his own behalf, and some of the witnesses were difficult to locate. (Fof nos. 118 and 119)

By letter dated April 9, 1985 to King, Farmers authorized his firm to make an offer of $25,000.00 to Stetler’s attorney, Ward. By letter dated April 12, 1985 to Ward, Adrian made an offer, good only for thirty (30) days, to settle the case for $25,-000.00. (Fof nos. 120 and 122). Stetler refused and counter-offered to settle for $250,000.00. This offer was in turn refused, and the parties began preparation for a second trial. (Fof no. 123)

Fosha was unaware that Farmers had offered to settle with Stetler for the policy limit. (Fof no. 121)

In December of 1985, prior to the second trial, the action was dismissed without prejudice in the state district court. It was refiled in U.S. District Court at Wichita on March 5, 1986. (Fof no. 124) On April 20, 1987, Fosha, through her counsel, unsuccessfully offered to allow judgment to be taken against her for $25,000.00, inclusive of costs to that date. (Fof no. 125)

The second trial took place in Topeka on May 2, 1987, concluding on May 4. Finding Fosha was 51% negligent and Stetler 49%, the jury in the second trial returned a verdict for $275,000.00. Proportioned for comparative fault, Stetler was awarded $140,250.00.

After the second trial in federal court, King met with Fosha and her father (Lewis Hagedorn) and suggested again they consult with independent counsel. (Fof no. 126)

Farmers paid the $25,000.00 policy limit into court. There was no appeal of the federal court trial verdict.

Stetler filed the instant garnishment proceeding against Farmers, alleging bad faith and negligence on behalf of Farmers for failure to timely discuss or negotiate a settlement within policy limits. Preparation for the garnishment action included taking depositions of Fosha, Lewis Hagedorn, Robert Adrian, Clarence King, David Knudson, Charles Snyder, and Richard Mansfield, all in 1988. Additionally, both parties obtained depositions from a number of expert witnesses from the legal and insurance professions.

Fosha testified at her April 16, 1988 deposition that although she was asked on the first day of trial in 1983 whether she wished to request the company to settle, she did not recall being told that the plaintiff had offered to settle his claim for the policy limits. Fosha also testified she never had a professional consultation with any attorney other than Knudson, Adrian, or King regarding the Stetler suit, although she knew she had such a right. (Fof nos. 99 and 128) Her aunt worked for attorney John Stites, but Fosha never talked as a client to Stites and did not obtain independent legal advice from him or any other lawyer concerning her rights. (Fof nos. 105 and 131) Fosha also testified in 1988 that she was never told at any time that if she made the request on the company to settle she might be relieved of liability for any excess, or that the liability for any excess might be shifted to Farmers. (Fof nos. 96, 99, 100, 102, 104 and 132) Fosha did not then recall being told, prior to the first day of the state court trial, she would be responsible for any judgment in excess of $25,000, but would not dispute the statement of Adrian or Knudson that they had explained to her, prior to that time, that she could be held liable for any excess judgment. (Fof no. 127)

Fosha further testified that no attorney ever advised her that she had the right to demand that Farmers pay the policy limit of $25,000 or less. (Fof no. 130) She understood that what Adrian told her was that if she requested Farmers pay the $25,-000 policy limit to Stetlei*, Farmers would take into account her decision, her feeling, but the final decision was up to Farmers. (Fof nos. 96 and 129)

In January of 1991, both parties consented to assign the proceedings to United States Magistrate Judge John B. Wooley at Wichita. Between July 8 and August 22, 1991, plaintiff and garnishee filed their suggested findings of fact and conclusions of law with memorandums in support. They also delivered to the Magistrate Judge, within a few weeks thereafter, all the trial exhibits in both cases, all the transcripts of the depositions taken before both trials and as a result of the garnishment proceeding and other allied papers and records.

ANALYSIS:

The issues before the court are mixed questions of fact and law regarding the possible bad faith and/or negligence of garnishee-insurance company in failing to timely negotiate toward settlement, within policy limits, on behalf of its insured, with the plaintiff-claimant.

The court sees this case as presenting two specific issues:

First, whether Farmers was guilty of bad faith and/or negligence in declining to negotiate in response to plaintiffs offer to settle, within policy limits, prior to the conclusion of the first trial; and, Second, if Farmers is so guilty, did Farmers’ offer of the policy limits prior to the second trial cure that deficiency?

The following discussion will detail those factors salient to the decision of the court, followed by specific findings of fact and conclusions of law and fact upon which its ruling is based.

In its arguments to the court, Farmers has taken the position that it cannot be guilty of bad faith or negligence for a number of reasons. First, the initial decision that Fosha was not liable for any claims by Stetler was made on the basis of a thorough, timely investigation which initially indicated that Stetler was speeding, passing in a no-passing zone and inattentive immediately prior to the collision. Second, the company took the additional precaution of having its attorneys review the investigative file, and those attorneys also reached the conclusion that the majority of fault rested with Stetler, hence, any claim could be successfully defended. Third, it is Farmers position that Fosha, the insured, was always well advised of developments in the case, and that she steadfastly insisted the action go to trial rather than settle. Finally, after reversal of the first trial verdict, and two years before the second trial, Farmers offered the policy limits to settle the claim. Farmers also points to the fact that the first trial resulted in a verdict in favor of Fosha, and that the finding of percentage of fault in the second trial, 51% to 49%, was as close as possible to still return a verdict in favor of the plaintiff.

Stetler, on the other hand, argues that bad faith and/or negligence existed on the part of Farmers, requiring a finding that Farmers is liable for the amount of the judgment in excess of the policy limits, as well as reasonable attorneys’ fees. Stetler argues Farmers adopted and maintained its position of non-liability from the outset, disregarded all unfavorable evidence, and never considered the possibility Fosha had failed to see the motorcycle coming, or had been in the southbound lane of travel when the collision occurred. Stetler also argues Farmers is guilty of bad faith and/or negligence due to its failure to make any attempt to settle before the first trial started, particularly in light of the conflict of interest between Farmers’ interests as compared to the interests of Fosha, the insured.

THE APPLICABLE LAW:

The duties owed between an automobile insurance carrier and an insured regarding claims which exceed the policy coverage have been well established through a series of decisions in the courts prior to the incidents which the court is now reviewing. The policies and theories serving as the foundation of those duties owed between the parties to an insurance contract have not changed during the several years of this prolonged litigation.

Once an insurer undertakes the defense of the insured’s interests against the claims of an injured party, that insurer owes a duty of due care to protect the rights of the insured, particularly as to negotiations to attempt settlement of the claim. Bennett v. Conrady, 180 Kan. 485, 489, 305 P.2d 823 (1957). The degree of care owed in the settlement of claims is the care and diligence a man of ordinary care and prudence exercises in the management of his own business affairs. Id. at 490, 305 P.2d 823.

An insurer defending an insured or negotiating for settlement on the insured’s behalf is bound by the mutual fiduciary relationship between the parties “to exercise reasonable care in conducting the defense or settlement.” Id. Standard automobile liability insurance policies reserve to the insurer the power to approve or deny settlement of a claim for any amount which is equal to or less than the limit of the policy coverage. When making such a determination, the insurer must give consideration to the insured’s interests. “Whether such consideration has been given is measured by the ‘good faith test’ and/or the ‘negligence test’____” Id. An insurer which fails to fulfill its duty to the insured may be liable for the full amount of an insured’s loss, even beyond the limits of the policy coverage. Id. at 489, 305 P.2d 823 (citing Anderson v. Southern Sur. Co., 107 Kan. 375, 191 P. 583 (1920).

The duties of an insurer in defending and settling claims against its insured were closely examined in Bollinger v. Nuss, 202 Kan. 326, 449 P.2d 502 (1969). To accomplish the public policy goal of protecting the insured’s interests, Kansas allows recovery against an insurer on theories of both bad faith and negligence. Because the insured has surrendered the right to conduct its own defense and settlement negotiations, “both due care and good faith are required of the insurer....” Id. at 333, 449 P.2d 502.

When analyzing the duty of the insurer, there are many similarities between the theories of “bad faith” and “negligence.”:

[E]ven those jurisdictions following [only] the bad faith rule recognize, at least by implication, that the company must, if it fails to settle, defend with ordinary care, and that negligence in investigation which leads to a mistake in failing to settle is also a breach of this duty of ordinary care of defense____ [T]he two tests have tended to coalesce, so that even those courts which reject the negligence test and apply exclusively the test of good faith, nonetheless, consider the insurer’s negligence relevant in determining whether or not the insurer exercised the requisite good faith [citations omitted].

The provisions of the policy requiring the insurer to defend also encompass the negotiation of any settlement prior to trial. When a claim is made against the insured for an amount in excess of the policy coverage, the insurer’s obligation to defend creates a conflict of interest on its part. On the one hand, its interests lie in minimizing the amount to be paid; on the other, the insured’s interests, which the insurer is supposedly defending, lie in keeping recovery within policy limits, so that he will suffer no personal financial loss. The conflict becomes particularly acute where there is an offer of settlement approximating policy limits. The insured’s desire to avoid the risk of a large judgment by settling within the limits of the policy, regardless of the merits of the claim, would compel him, were he in charge of settlement negotiations, to accept the offer. The insurer’s interest, on the other hand, are prompted by its own evaluation of the liability aspects of the litigation and a desire not to expose itself to payments which do not adequately reflect the dangers that might be involved in pursuing the case to trial. When the settlement offer approaches policy limits, the insurer has a great deal less to risk from going to trial than does the insured, because the extent of its potential liability is fixed.

Id. at 335-36, 449 P.2d 502 (emphasis added).

An insurer may legitimately consider its own interests, but it must give equal consideration to the interests of the insured, following what has come to be known as the “equal consideration rule.” The fiduciary relationship of the parties requires the “utmost” good faith between the parties; failure of the insurer to give equal consideration to the interests of the insured is an act of bad faith. Id. at 337, 449 P.2d 502 (citing American Fidelity & Casualty Co. v. G.A. Nichols Co., 173 F.2d 830, 832 (10th Cir.1949)); see also Kunkel v. Continental Casualty Co., 866 F.2d 1269, 1275 (10th Cir.1989) (requiring insurer to give equal, if not paramount, consideration to the interests of the insured in excess liability claim) (citing S.R. Hazelrigg v. American Fidelity & Casualty Co., 241 F.2d 871, 873 (10th Cir.1957)). The equal consideration rule requires consideration of the total risk without regard to who is to bear that risk. In other words, the insurer must determine whether a settlement is acceptable by assessing the total risk as if the insurer itself would be liable for the entire sum, and not just for the amount of the policy limits. Bollinger, supra, 202 Kan. at 337, 449 P.2d 502:

The result is that under the negligence test the insurer must conduct itself with that degree of care which would be used by an ordinarily prudent person in the management of his own business, with no policy limits applicable to the claim. Likewise, under the good faith test, the insurer must in good faith view the sitúation as it would if there were no applicable policy limits____ [I]t would appear the two rules have tended to merge. In the final analysis, the question of liability depends on the circumstances of the particular case and must be determined by taking into account the various factors present____

[such as] [1] the strength of the injured claimant’s case on the issues of liability and damages; [2] attempts by the insurer to induce the insured to contribute to a settlement; [3] failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured; [4] the insurer’s rejection of advice of its own attorney or agent; [5] failure of the insurer to inform the insured of a compromise offer; [6] the amount of financial risk to which each party is exposed in the event of a refusal to settle; [7] the fault of the insured in inducing the insurer’s rejection of the compromise offer by misleading it as to the facts; and [8] any other factors tending to establish or negate bad faith on the part- of the insurer.

Id. at 338, 449 P.2d 502 (citing Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 689, 319 P.2d 69 (Cal.App.1957). The factors cited by the Bollinger court may be considered individually as they apply to the circumstances; not all of the factors need be applicable in any individual case to result in a finding of bad faith or negligence.

The existence of bad faith or negligence in an insurer’s failure to settle a claim is always a question for the trier of fact.

Something more than a mere error in judgment is necessary to constitute bad faith. The company cannot be required to predict with exactitude the results of a trial; nor does the company act in bad faith where it honestly believes, and has cause to believe, that any probable liability will be less than the policy limits, [citation omitted] Good faith on the part of the insurer implies honesty, fair dealing and adequate information.

Id. 202 Kan. at 341, 449 P.2d 502 (emphasis added).

If the investigation of the facts by the insurer indicates potential liability of the insured beyond the amount of the policy coverage, the insurer must communicate that information to the insured, along with any offers of settlement, so the insured may protect his or her interests. Id. at Syl. 6.

The rules of law described by the court in the preceding discussions were reiterated in Rector v. Husted, 214 Kan. 230, 519 P.2d 634 (1974) and Farmers Ins. Exchange v. Schropp, 222 Kan. 612, 567 P.2d 1359 (1977). An additional question was raised in Rector: In the absence of any settlement offer on the part of the injured claimant, is the insurer obligated to initiate settlement negotiations? In that case, the insurer elected to go to trial to determine the issue of damages, although there was little question of the fault of the insured in causing the injury. The claimant offered to settle for an amount well below the policy limits, but the insurer declined, believing there existed little chance of a recovery in excess of the policy limits. After a trial on the merits, a judgment exceeding the policy limits was entered in favor of the plaintiff, and the insured was held liable for the entire amount. The Kansas Supreme Court affirmed, finding in that case that due to the impossibility of predicting the results of a trial with any accuracy, the insurer had an obligation to attempt to keep the claim from a jury through a good faith attempt to negotiate a settlement. See also Potomac Insurance Co. v. Wilkins Company, Inc., 376 F.2d 425, 428-29 (10th Cir.1967) (holding submission of liability issue to jury in case presenting a recognized risk of damage award exceeding policy coverage evidences insurer’s bad faith).

The decision in Rector has been construed to require an insurer to initiate negotiations when no settlement offer is forthcoming from the claimant. Coleman v. Holecek, 542 F.2d 532, 536-37 (10th Cir.1976).

It is necessary to make a detailed examination and review of the factual circumstances of Farmers conduct relating to Stetler’s claim. The motive of the insurance company in not settling is at issue. A decision not to negotiate toward settlement does not lead to liability if it results from careful consideration of the insured’s interest’s, as well as those of the insurer. A reasonable business judgment, based at the time on adequate information, becomes no less reasonable merely by contrary insights gained through hindsight. U.S. Fidelity & Guaranty Co. v. Canale, 257 F.2d 138, 140 (6th Cir.1958).

DISCUSSION:

In researching the law of bad faith/negligence in insurance litigation, the court has found no case which balances, so precariously, the thin line separating liability from non-liability, as does the case at bar.

The first issue is whether Farmers was negligent or acted in bad faith in declining to negotiate in response to plaintiff’s offer to settle, within policy limits, prior to conclusion of the first trial.

Under Bollinger, the fact that plaintiff claimed an amount in excess of the policy limit created a conflict of interest for Farmers. That the value of plaintiff’s claim, if successful, would exceed the policy limit, was obvious to Farmers and its lawyers. To avoid acting in bad faith, Farmers was required to give equal consideration to the interests of Fosha, the insured, and Farmers’ own interests. Equal consideration occurred if Farmers reviewed and acted on the risks as if Farmers itself would be liable for the entire sum, and not just for the amount of the policy limits.

To avoid negligence in the handling of the defense of Fosha, the standard of due care imposed on Farmers was that which would be used by an ordinary prudent person in the management of his own business affairs, with no policy limits applicable to the claim. (Bennett, supra, 180 Kan. at 490, 305 P.2d 823)

Eight factors for consideration were identified in Bollinger, supra, to assist courts in evaluating the conduct of an insurer regarding bad faith and negligence claims; several of those factors are obviously inapplicable to the case at bar. The factors which do apply relate to the strength of Stetler’s claim as to liability, and damages; the quality of Farmers’ investigation of evidence damaging to Fosha’s position; Farmers’ reliance on the advice of its attorneys; the nature of the notice Fosha received regarding Stetler’s offers to settle; the financial risk facing each party; and the existence of any other relevant factors.

Evidence is clear regarding the factor of the financial risk posed to the parties. Unquestionably, representatives of Farmers, and the attorneys who later reviewed Farmers’ file and undertook the defense of Stetler’s claims, recognized that any recovery in favor of Stetler would almost certainly expose Fosha to personal liability beyond the $25,000.00 limits of policy coverage. Farmers began investigation of the accident within four days of occurrence, and was aware from the outset of the severity of Stetler’s injury. In statements to Fosha, Adrian estimated that Stetler’s injuries could lead to a recovery of $500,-000.00 or even in excess of $1,000,000.00. Farmers’ risk was then limited to $25,000 under the policy.

Payment by Farmers of the $25,000.00 policy limits at or before the time of the first trial to compromise Stetler’s claim would have precluded any possible risk that Fosha would become personally liable for an excess judgment. However, Farmers declined to negotiate with plaintiff’s attorney. If that decision was unreasonable, judged by the standard of an ordinary prudent business person in the management of his own business affairs, Farmers’ conduct must be considered negligent.

Farmers’ position was that any possibility Fosha would become personally liable for an excess judgment was offset by the potential for successfully defending Stetler’s claim, and that the possibility of recovery against Fosha was remote enough that Farmers could “wait for suit on the claim” and avoid any settlement negotiations by defending the suit at trial. By taking this position, Farmers appears to have given insufficient weight to at least two other factors which were indispensable parts of the total equation, i.e. the quality of its investigation, particularly the evidence damaging to Fosha’s position (conversely, the strength of Stetler’s claims on the liability issue) and the natural sympathy a jury would probably have for a young man with such disfiguring injuries.

Farmers’ initial decision that Stetler was legally at fault for his own injuries was made in November of 1979 and immediately communicated to Stetler’s family. That decision was based on the statements of Fosha, Stetler, four witnesses, and the police report. As a whole, the information Farmers had indicated that Stetler was exceeding the speed limit by anywhere from 5 to 30 m.p.h., was inattentive, was passing in a no-passing zone, and that impact occurred on the centerline of the road, or just east of the centerline on Fosha’s side.

Farmers also had information which indicated that some degree of fault for the collision might rest on Fosha. Fosha had pulled from a private drive (parking lot) onto a public roadway, an act which is accompanied by duties requiring watchfulness and due care on the part of the driver entering the public way. Fosha described looking both directions before entering Denison Avenue, but did not see Stetler approaching on his motorcycle. She described seeing a bicycle approaching on the roadway from a distance before she pulled out. No other witness ever acknowledged seeing a bicycle in the area that day, and it is possible that Fosha mistook Stetler on his motorcycle for a rider on a bicycle. Furthermore, the witnesses disagreed about the lane of traffic in which the collision actually occurred. Any evidence that the collision occurred in Stetler’s lane of traffic would be damaging to Fosha’s position.

Two of the four witnesses, Richards and Zidek, did not see the vehicles collide, or the location of the vehicles at impact, and therefore could not help identify the location of the point of impact. A third witness, Tami Kater, placed the point of impact in the northbound lane of traffic, but she had not seen the motorcycle before it hit the car. The fourth, Sam Owen, who was following behind Stetler and witnessed the collision, placed the point of impact well into the southbound lane. Owen stated Fosha’s car was in a position that made the collision unavoidable. Although Farmers discounted Owen’s placement of the point of impact as “hopelessly confused” due to his placement of the impact on the right rear, rather than left rear, of Fosha’s vehicle, Farmers was willing to rely on Owen’s estimate of Stetler’s speed, and Owen’s testimony that Stetler passed him on Owen’s right, just seconds before impact.

After receiving Mansfield’s investigative report regarding the collision, Farmers’ next step was to forward the file to its attorneys for review. Although the attorneys were in agreement with Farmers that Stetler was more liable than Fosha for the collision, they did not apportion all fault to Stetler, and identified potential difficulties if a trial should take place. In May of 1980, attorney King agreed that “on paper” it appeared that Stetler “was more than 50% the fault” of the accident. King’s assessment of liability was qualified, however he started with an assumption that “our insured was unable to see the plaintiff’s motorcycle at the time [s]he pulled out from the parking lot.” King further suggested that some of the evaluation would “rest on the ability of the witnesses to convey the liability picture.” (May 5, 1980 letter from King to Snyder.)

A year later, by letter dated June 11, 1981, David Knudson told Farmers that “investigation to date supports a conclusion that plaintiff was more than 50% responsible.” Knudson went on to state:

It will be necessary for us to take the deposition of the police officer who investigated the accident and pin him down as to his diagram. Once this is completed it may be necessary for us to hire an accident reconstructionist and have him prepare some type of report and/or exhibit regarding the positions of the automobile and the motorcycle at the time of the impact and the speed of the vehicles at the time of collision. From this we should be able to formulate a definite opinion as to fault. As you will recall, the police officer’s report had the accident occurring very near the center line of the road. It is possible that a jury would conclude that defendant should have seen the motorcycle and yielded the right of way. Thus we are quite concerned with the actual point of impact. (Emphasis added).

Notably, Knudson assesses the plaintiff’s fault at more than 50%, and states additional information is necessary to “formulate a definite opinion.” Knudson also highlighted the potential for blame to be assessed to Fosha. When Adrian assumed control of the file in 1981, his assessment of the available information was that “to date, at least 51% of the liability rests with plaintiff Stetler.”

When sworn statements were obtained from the witnesses by Adrian in March of 1981, Sam Owen was still adamant about witnessing the point of impact in the southbound lane, and now indicated Fosha seemed to have stopped or been slowing in the roadway. Tami Kater’s previous opinion that impact occurred after Fosha’s vehicle completely entered the northbound lane was unchanged except she stated she could not be certain of that. Francis Zidek, who in previous statements had had no idea where the vehicles were at impact, now stated under oath that the “majority” of Fosha’s car was over the centerline at the point when the motorcycle and driver were still in the air. Michael Richard stated he had no memory of the collision independent of his original statements made in 1979. Thus some room was left to conclude that some portion of Fosha’s vehicle remained in the southbound lane at the time of impact. While these statements are not conclusive regarding fault, they reflect some erosion of the favorable previous statements of witnesses which Farmers had relied on (police report statements and unsworn statements to Mansfield shortly after the collision), at least in part, in declining to negotiate toward compromise and settlement.

By the time of the trial in 1983, depositions of the witnesses had been taken. The deposition testimony contained only minor discrepancies from the sworn statements previously obtained by Adrian. Additionally, the deposition of Leonard Komarek (taken November 4, 1981) described a conversation in which Fosha was purported as saying she had pulled into the street, seen the oncoming motorcycle, and because there was no place for her to go, she just stopped. This seems to support Owen’s statement that Fosha was stopped or slowing at the time of impact. Also, each party had obtained accident reconstruction expert witnesses. Not surprisingly, Stetler’s expert placed the point of impact in the southbound lane. Fosha’s expert placed the point of impact in the northbound lane. Both experts were in agreement on one item: the point of impact as located by