Summary
In Thornton, we held that a surety's liability extended only to the limits of the bond for the alleged failure to settle a claim presented by an injured third party.
Summary of this case from Suver v. Personal Service Ins. Co.Opinion
No. 75-900
Decided December 22, 1976.
Motor vehicles — Personal injury claims — Financial responsibility bond — Surety's failure to settle or defend — Limits of liability.
APPEAL from the Court of Appeals for Lorain County.
Plaintiffs Lona J. Thornton and Glen E. Miller, appellees herein, filed an action, in 1972, against defendant-appellant, Personal Service Insurance Company (formerly Pioneer Mutual Casualty Co.), in the Court of Common Pleas of Lorain County, praying for damages for an alleged failure of appellant to settle a personal injury claim and failure to provide legal defense with respect to the claim.
The personal injury claim arose in 1967 when Thornton sustained serious injuries as the result of an automobile collision. Miller owned, and was a passenger in, the vehicle which collided with the vehicle in which Thornton was a passenger. At the time of the collision, Miller's car was operated by one Roger M. Logan and was driven on the wrong side of the road. Miller was then the principal, and appellant the surety, under a financial responsibility bond in the amount of $10,000 issued by appellant. As to settlement and defense of claims against the principal, the contract provided:
"VIII. As respects such coverage as is afforded by the Financial Responsibility Bond, the Surety shall (a) Defend in the Principal's name and behalf any suit against the Principal, alleging such injury or destruction and seeking damages on account thereof even if such suit is groundless, false or fraudulent; but the Surety shall have the right to make such investigation, negotiation, and settlement of any claim or suit as may be deemed expedient by the Surety; (b) pay all premiums on appeal bonds required in any such defendant suit, but without any obligation to apply for or furnish such bonds; and expenses incurred by the Principal, in the event of bodily injury, for such immediate medical and surgical relief to others as shall be imperative at the time of accident. The Surety agrees to pay the amounts incurred under this paragraph, except settlements of claims or suits, in addition to the applicable limit of liability of the bond."
Although it was apparent soon after the collision that Thornton's injuries and medical expenses were substantial and that the driver of Miller's car had no insurance coverage, appellant refused demands by Thornton's counsel for payment of the full amount of the bond. In 1969, Thornton and her mother filed an action against Mary Jane Halada, Logan and Miller for $200,000 in damages, and appellant provided counsel who filed an answer in the cause. On the day set for trial, appellant paid $10,000 into court and withdrew its counsel. Miller then retained counsel for himself. The trial resulted in a jury verdict for Lona J. Thornton for $75,000 against Logan and Miller. Miller thereafter assigned his rights "to any and all claims that he * * * had * * * against * * * [appellant]" for "failing to settle * * * prior to lawsuit and/or prior to final judgment" in consideration of Thornton's agreement not to attempt to collect the amount of the judgment entered against him.
In the instant cause, judgment was rendered against appellant in favor of Lona J. Thornton in the amount of $10,000 compensatory damages and $55,000 punitive damages, and in favor of Glen E. Miller in the amount of $3,500.
Upon appeal and cross-appeal to the Court of Appeals, that court held as follows:
"We find, as a matter of law, that plaintiff [Thornton] was entitled, under the circumstances to compensatory damages in the sum of $65,000. The jury awarded $10,000 compensatory damages and $55,000 punitive damages. We are of the further opinion that the plaintiffs-appellees' cross-appeal is well taken to the extent that the judgment must be modified to conform to the facts. We, therefore, modify the judgment to read $65,000 compensatory damages, in lieu of the jury award of $10,000 compensatory damages and $55,000 punitive damages.
"The judgment is modified, and affirmed as modified."
Appellant appealed to this court from that judgment and appellees filed a cross-appeal contesting the action of the Court of Appeals modifying the judgment to provide only for compensatory damages.
The cause is now before this court pursuant to the allowance of a motion to certify the record.
Weisman, Goldberg Weisman Co., L.P.A., and Mr. Fred Weisman, for appellees and cross-appellants.
Messrs. Cronquist, Smith Marshall and Mr. Jack F. Smith, for appellant and cross-appellee.
The determinative issue in this cause is whether appellant is liable for its failure to settle and to provide defense in the action filed by appellee Thornton against appellee Miller.
In finding such liability, the Court of Appeals reasoned:
"The provision for a financial responsibility bond is contained in R.C. 4509.45 and R.C. 4509.59. In its brief, appellant urges the argument that, `A bond does not insure the principal against liability nor does it agree to indemnify him against loss.' As far as this argument goes, it is true. But as the appellant concedes * * * in its brief the financial responsibility bond is an agreement and two of the parties to that agreement are the appellant and Glen E. Miller.
"* * *
"This case revolves around the interpretation of * * * [the clause of the agreement relating to the duty of the surety to defend and settle]. The appellant obligates itself to defend its principal and reserves to itself the right to make settlements. These obligations are substantive and impose duties on the appellant. Whether these duties extend beyond the duties which appellant would have as a result of the existence of the Financial Responsibility Bond under the statute in the absence of Clause VIII * * * is not an issue * * *."
Subsequent to the decision of the Court of Appeals in this cause, this court, in Republic-Franklin Ins. Co. v. Progressive Cas. Ins. Co. (1976), 45 Ohio St.2d 93, 341 N.E.2d 600, had before it the question whether a financial responsibility bond constituted liability insurance. Concluding that it did not, the court, at page 95, stated:
"Throughout R.C. Chapter 4509 the dissimilarity of a financial responsibility bond and liability insurance is apparent.
"A liability insurance policy is written for the protection of the insured. However, a financial responsibility bond does not protect the principal by insuring him against liability. A financial responsibility bond is written for the protection of the motoring public, who may be injured by the principal. If the surety is compelled to make payment for damages caused by the principal, it has the right to seek reimbursement from the principal. The Progressive financial responsibility bond, in the present case, expressly provides for reimbursement by the principal. This fundamental difference between insurance and a financial responsibility bond compels this court to find that a financial responsibility bond is not insurance, as that term is used in Republic-Franklin pro-rata provisions."
It follows from the foregoing that the purpose of a financial responsibility bond is not to benefit the principal. This concept was recognized in Ferguson v. Employers Mut. Cas. Co. (1970), 254 S.C. 235, 242, 174 S.E.2d 768, wherein the Supreme Court of South Carolina observed:
"The primary purpose of compulsory motor vehicle liability insurance is to compensate innocent victims who have been injured by the negligence of financially irresponsible motorists. Its purpose is not like that of ordinary liability insurance to save harmless the tort feasor himself. The injured person's rights against the insurer are not derived through the insured as in the case of voluntary insurance. * * *"
Inasmuch as the underlying purpose of a financial responsibility bond is to protect the public and not to save harmless the principal, it follows that, notwithstanding the provisions for defense and settlement contained in the agreement herein between the surety and principal, the surety's liability extended only to the limits of the bond. When appellant paid the amount of the bond into court, it discharged its liability to the injured party and its duty to the principal and, therefore, it is not liable beyond that amount for failure to settle or defend.
The judgment of the Court of Appeals is reversed.
Judgment reversed.
O'NEILL, C.J., CORRIGAN, STERN, W. BROWN and P. BROWN, JJ., concur.
HERBERT and CELEBREZZE, JJ., dissent.
Since the law is as the majority says, there was no need for appellant, in exchange for money paid to it by Miller, to promise to defend "any suit against [Miller] * * * even if such suit is groundless, false or fraudulent." However, such a bargain was struck between appellant and appellees' assignor and I see no justification for ignoring that fact. I would affirm.
CELEBREZZE, J., concurs in the foregoing dissenting opinion.