Before CLARK, Chief Judge, MADDEN, Judge, United States Court of Claims,*fn* and HINCKS, Circuit Judge.
The plaintiff brought this action in the United States District Court for the District of Vermont seeking to have the defendant declared legally obligated*fn1 to defend the plaintiff in a suit brought by one Arthur North against the plaintiff, and further seeking damages from the defendant because of its failure to defend the plaintiff in that suit. Upon the verdict of a jury, the District Court rendered a judgment for the plaintiff in the amount of $4,500. The defendant has appealed.
The defendant, on August 25, 1955 issued an "Owner's, Landlord's and Tenant's Public Liability Policy" to Ira E.Yandow and Donald McGettrick, doing business as the Essex Restaurant. The policy, among other things, protected Yandow and McGettrick against liability to other persons for injuries occurring in their restaurant. It contained, among numerous other provisions, the following ones pertinent to this litigation.
"1. Coverage A - Bodily Injury Liability. To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury, sickness or disease, including death at any time resulting therefrom, sustained by any person, caused by accident and arising out of the ownership, maintenance or use of the premises for the purposes stated in the declarations, or operations necessary or incidental thereto.
"II. Defense, Settlement, Supplementary Payments. As respects the insurance afforded by other terms of this policy the company shall
"(a) defend any suit against the insured alleging such injury, sickness, disease, death, 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;
"(b) pay all premiums on bonds to release attachments for an amount not in excess of the applicable limit of liability of this policy, all premiums on appeal bonds required in any such defended suit, but without any obligation to apply for or furnish any such bonds."
It also contained the following definition:
"2. Assault and Battery. Assault and battery shall be demed an accident unless committed by or at the direction of the insured."
On January 16, 1956, while the policy was in effect, there was a fracas in the Essex Restaurant. As a consequence of that incident, one Arthur North employed a lawyer and directed him to bring a civil suit against McGettrick for assault and battery. North's lawyer wrote to McGettrick, advising him of North's claim. McGettrick turned the letter over to his insurance agent, who gave it to an adjuster for the defendant insurance company. The adjuster obtained written statements from McGettrick and Yandow. He learned from North's lawyer that North was claiming that McGettrick had committed an assault and battery upon him. The adjuster thereupon advised McGettrick that the insurance company would not defend the threatened suit by North because the policy did not cover the situation. This statement was repeated to Mr. MacCausland, a lawyer whom McGettrick had employed.
North brought his suit for assault and battery alleging damages of $5,000 and McGettrick was obliged to furnish a bail bond to avoid being held on a "body writ." He would not have been obliged to furnish the bond if the insurance company had undertaken to defend the suit.
McGettrick's attorney, in preparing to defend North's suit, obtained statements from twelve or more witnesses of the restaurant incident tending to show that McGettrick's battery of North was committed in self-defense. He discussed these statements with the insurance company's adjuster, but did not show them to him, though requested to do so. He persuaded North's attorney to agree to accept $1,000 instead of the $5,000 named in the suit. He advised the insurance adjuster of this fact, and the insurance adjuster finally settled the North claim for $400, in order to reduce the expense of defending a possible action against the insurance company.
McGettrick thereupon brought the instant suit against the defendant insurance company. The District Judge instructed the jury that, when the claim of North was brought to the attention of the insurance company, it was under a duty to make a reasonably careful investigation to determine whether McGettrick, in the fracas in the restaurant, was guilty of an assault and battery, or acted in self-defense and had therefore not committed an assault and battery; that if the insurance company did not make such an investigation it failed to act in good faith when it disclaimed coverage; that if the insurance company failed to make the required investigation, and if the jury found that McGettrick did act in self-defense, then the ...