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Traders & General Ins. Co. v. Rudco Oil & Gas Co.

June 26, 1942

TRADERS & GENERAL INS. CO.
v.
RUDCO OIL & GAS CO.



Appeal from the District Court of the United States for Eastern District of Oklahoma; Eugene Rice, Judge.

Murrah

Before PHILLIPS, HUXMAN, and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

Two related questions are presented here on appeal: (1) whether bodily injuries and death, alleged to be caused by the negligence of the assured, are within the coverage of a public liability insurance policy issued to it by the insurer, and (2) does assured's voluntary compromise and settlement of claims and suits against it for such bodily injuries and death bar a recovery on the policy which provides "the assured shall not voluntarily assume any liability, settle any claim, except at the assured's own cost. * * * "

On February 11, 1939, the Traders & General Insurance Company (herein sometimes called insurer) issued to the Rudco Oil and Gas Company (herein sometimes called assured) its standard type public liability insurance policy covering certain oil field operations of Rudco. The policy covered the legal liability of the assured for bodily injuries and death to persons arising out of its operations, limited to $5,000 for one person, or $10,000 for more than one person.The insurer agreed to defend, in the name and on behalf of the assured, any suit against it seeking damages on account of bodily injuries or death, or until the insurer should elect to effect a settlement thereof. In addition to the provision in the policy against voluntary settlement by the assured, it was further agreed that no action would lie against the insurer to recover any loss or expense alleged to be covered by the policy, until the amount of such loss was made certain either by final judgment against the assured after trial of the issues, or unless otherwise agreed in writing.

It was also stipulated that in undertaking to investigate accidents and claims, and in the compromise and settlement of the same, the insurer should serve the assured in such manner as the insurer deemed best and expedient and would be liable to the assured only for wilful breach of its undertaking.

The policy contained a rider which exempted from its coverage any injury incurred "away from or off the premises owned, leased or occupied by the named assured" or for "any injury incurred either on or off the premises arising out of, or resulting from, the delivery, sale, or distribution of natural gas."

While the policy was in force, and on or about November 27, 1939, Carl H. Nelson, his wife, and three minor children filed suits against Rudco in the aggregate sum of $63,000, alleging negligent operation of an oil and gas lease by Rudco, which caused a fire and explosion on October 14, 1939, and resulted in bodily injuries and death to members of the Nelson family. After investigation, the Traders & General denied liability under the policy for the asserted losses on the grounds: (1) the injuries complained of, and for which claims were asserted, were incurred away from, or off the premises owned, leased or occupied by the assured, and (2) the injuries incurred arose out of, or resulted from, the delivery, sale or distribution of natural gas, and therefore fell outside the coverage of the policy.

The parties agreed that the Traders & General should defend the suits "without waiving any of your rights to defend on the policy of insurance should the occasion arise for the institution of a suit thereon. * * * In other words, the rights of the respective parties shall not be jeopardized, altered, or changed by virtue of any investigation or the defense of said suits but shall be determined by the terms and conditions and circumstances surrounding the insurance policy or policies. * * * ." Notwithstanding this agreement, while the damage suits were pending, and on January 14, 1940, Traders & General instituted a suit against Rudco, and the plaintiffs in the damage suits, for a judgment declaring its non-liability under the policy.

The Rudco was convinced of its legal liability and was "morally certain" that if the suits were tried the ultimate recovery would far exceed the limits of the policy.Rudco believed that a trial of the issues relating to coverage, raised by the suit for declaratory judgment, would greatly prejudice the defense of the damage suits, and sought to induce Traders & General to refrain from the trial of the declaratory judgment action until the damage suits were tried or settled, but Traders & General refused unless Rudco would agree to pay an attorney fee of $1,000 or $1,500 incurred in the defense of the damage suits, in the event Traders & General succeeded in establishing its non-liability under the policy of insurance.

Meanwhile, with full knowledge of Traders & General, Rudco negotiated with the plaintiffs in the damage suits, obtained an offer of settlement in the total sum of $17,000, and secured the offer of Carter Oil Company, a joint tort-feasor, to contribute one-half of the amount tentatively agreed upon in settlement. In a letter dated March 15, 1940, to Traders & General Rudco stated: " * * * We are morally certain that we could not escape a total liability of less than about double the amount of these settlements.We are also convinced that the division between Carter and Rudco, that is, fifty-fifty, is a fair and equitable division of responsibility * * * . We cannot wait for a trial in the case brought by you for a declaratory judgment and still avail ourselves of this proposition of settlement. The settlement must be accepted immediately and without delay and we are thoroughly convinced that it is entirely too favorable to Rudco to warrant a rejection of same. * * * We hereby request and demand that you settle each and all of these cases * * * within the terms of the said insurance policy * * * and hereby warn you that upon your failure to so do the assured will hold you responsible for any and all damages that may result to it and for any judgment that may be rendered against it in excess of the face of your policy, as well as the full amount of your insurance policy. * * * In the event you believe that these settlements are not fair, just and equitable settlements on behalf of Rudco or that the division of responsibility between Rudco and Carter is not fair, just and equitable, then we request and demand that you so state particularly pointing out the grounds of complaint and indicate your willingness to co-operate in any effort to either reduce the amount of the settlements or the proportions to be borne by Rudco. These suits are too dangerous, in our judgment, on behalf of Rudco to warrant the hazard of trying them."

Traders & General refused to agree to the settlements, or to participate therein, contending: (1) that Rudco was free from negligence and therefore not liable for the injuries; (2) that the proffered compromise and settlement was unreasonable, and (3) that the policy of insurance did not cover the loss. "For these reasons we contend we are not bound in law, either to settle, agree to settle, or pay any part of any judgment. * * * These are our contentions and will be our legal position if these cases are settled and suit is brought by your company to enforce liability under the policy." Traders & General refused to contribute $4,500 to the proposed settlement as suggested by Rudco, but "purely as a matter of policy" agreed to contribute $2,000 to any settlement made.

After much correspondence between the parties, Rudco through its attorneys informed Traders & General that on an appointed date the proposed settlements in the damage suits would be presented to the court, stating: " * * * At that time the reasonableness of the settlements, as well as the reasonableness of the division of responsibility between Rudco and Carter will be submitted to the court for determination. If you have any evidence that you care to offer on any of the issues to be there presented and determined, you will be given full opportunity to present same and assist in any other way in reducing the amount of the settlements. * * * Rudco hereby requests and demands that you have a representative present to participate in all negotations. * * * These matters cannot be further delayed and Rudco hereby vouches you into these cases as its insurance carrier, all of course, without prejudice to your rights in any litigation between you and Rudco relative to the validity or non-validity, coverage or non-coverage of the insurance policy in question. * * * We have gone into these matters very thoroughly and are convinced that these settlements are advantageous to Rudco and that it cannot afford to hazard the outcome of the trials on these claims. * * * ." Traders & General consistently refused to agree to the settlements, participate therein, or to accept any liability but steadfastly adhered to its former position in regard to the settlements and liability.

After Rudco had paid its agreed share of the judgment and after due demand, it instituted this suit on the policy to recover the amount paid in compromise, alleging substantially the facts herein related. Traders & General answered by reasserting its non-liability. By amendment to its answer it invoked the provision of the policy prohibiting settlement without its consent, and alleged ...


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