Lead Opinion
delivered the Opinion of the Court.
We granted certiorari to review the court of appeals opinion in Bernhard, v. Farmers Insurance Exchange,
I.
This is an action by the insured, Sandra Bernhard, against her automobile liability insurer, Farmers Insurance Exchange (“Farmers”), for bad faith breach of insurance contract. Bernhard’s automobile insurance policy provided bodily injury liability protection in the amount of $100,000 per person and $300,000 per accident. The policy also gave Farmers “the right and duty to defend, at its own expense, any suit against the insured seeking damages on account of such bodily injury or property damage....” The policy further read: “The Company may .make such investigation and settlement of any claim or suit as it deems expedient, but shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of liability has been exhausted by payment or judgments or settlements.”
On December 5, 1986, Bernhard drove through a stop sign and struck a car, seriously injuring the two occupants, John and Lucille Olivas. Bernhard, who had consumed several alcoholic drinks before driving home from her job as a waitress at the Flatirons Country Club, was found to be legally intoxicated at the time of the accident. The Oli-vases sued Bernhard and the Flatirons Country Club for compensatory and exemplary damages in excess of Bernhard’s $100,000 per person policy limits. As required by the terms of the contract, Farmers provided an attorney to defend Bernhard.
On two separate occasions the Olivases made time-limited offers to settle their claims against Bernhard: first for the applicable policy limits of $200,000 and later, for $230,000. Farmers did not accept either of these settlement offers. At trial, the jury found against Bernhard and the Flatirons Country Club and awarded the Olivases damages substantially in excess of the policy limits. John and Lucille Olivas were awarded $407,000 and $163,000 in compensatory damages, respectively, and $5,000 each in exemplary damages. After the Flatirons Country Club paid the amount for which it was liable and Farmers paid the Olivases the $200,000 it owed on Bernhard’s policy, $82,-000 remained owing on the judgment against Bernhard.
Bernhard then entered into an agreement with the Olivases in which Bernhard agreed to pursue a bad faith claim against Farmers seeking the amount of excess judgment as damages. Under this agreement, the Olivas-es would receive the first $82,000 of any recovery and anything above that would go to Bernhard. As long as Bernhard went through all available appeals and exhausted all her remedies, the Olivases agreed not to
Bernhard brought this suit for bad faith breach of contract against Farmers for its failure to settle with the Olivases, She sought a damage award for the excess judgment of $82,000 and additional damages for emotional distress. The case initially resulted in a hung jury but was retried in July of 1992. The jury did not award Bernhard any damages for emotional distress, but did award her $108,911.30 for the excess judgment and for the attorney fees she had incurred in bringing the bad faith breach of contract case against Farmers.
Farmers moved for a new trial or to amend the judgment, arguing that the jury could not award attorney fees. Bernhard agreed that the jury’s verdict should not have included attorney fees, but filed a separate motion seeking an award of attorney fees from the court. At the hearing, the trial court judge awarded Bernhard $32,000 for attorney fees incurred in the pursuit of her bad faith claim against Farmers. Farmers appealed and the court of appeals reversed the trial court’s award of attorney fees.
We granted certiorari to determine: Whether the court of appeals erred by reversing the trial court’s award of attorney fees upon the petitioner’s successful litigation of a tortious breach of insurance contract claim.
We hold that, unless specifically provided for in the insurance contract, attorney fees are not recoverable upon successful litigation of a bad faith breach of insurance contract claim. We therefore affirm the court of appeals’ reversal of the trial court’s award of attorney fees to Bernhard and remand the case for proceedings consistent with this opinion.
II.
As a general rule, in the absence of a statute, court rule,
The rationale behind the rule is broad-ranging: for example, responsibility for one’s own legal expenses is thought to promote settlement; poor litigants may be discouraged from instituting actions to vindicate their rights if the penalty for losing were to include paying their opponent’s attorney fees; and the difficulty of ascertaining reasonable attorney fees in every case would pose a substantial burden on judicial administration. See Fleischmann Distilling Corp. v. Maier Brewing Co.,
Colorado does recognize several exceptions to the general rule,
Bernhard argues that her situation is analogous to that discussed in Farmers Group, Inc. v. Trimble,
The Trimble eases were related to a third party personal injury lawsuit brought against the insured, Trimble, based on several claims including one of negligent entrustment. Trimble’s insurer, Farmers Group, Inc., was contractually required to provide for Trim-ble’s legal defense. Farmers Group, Inc., did hire an attorney to defend Trimble. However, while this third party case was ongoing, Farmers Group, Inc., filed a declaratory judgment action against Trimble seeking a determination that Trimble’s policy did not provide coverage for the negligent entrustment claim. As a result, Trimble was unable to discuss the third party proceedings with the attorney retained by Farmers Group, Inc., and because he was facing an imminent deposition in the third party suit, he was forced to retain a private attorney to defend himself. The third party claim against Trim-ble eventually settled out of court. In the meantime, Trimble counterclaimed against the insurer in the declaratory judgment proceeding, seeking reimbursement of the money he had spent on hiring the private attorney.
The court of appeals in Trimble I held that Trimble could recover his costs in hiring an attorney to defend him against the claims brought by the third party. The court reasoned that the fees were recoverable since they were incurred as a direct result of the insurer’s failure to provide him with a legal defense, which was an explicit term of the contract. The court stated that the fees could be “considered damages naturally flowing from the failure of the insurer to exercise reasonable care in representing the insured in the course of litigation.” Trimble I,
This court explained in Bunnett v. Small-wood,
While the facts show that the award of attorney fees in the Trimble cases fits within an exception to the American rule accepted in Colorado, the language in Trimble II,
A.
In Trimble II, this court concluded that a quasi-fiduciary relationship exists between an
Attorney fees may be recoverable in an action for breach of fiduciary duty as a recognized exception to the American rule. In Heller v. First Nat’l Bank, N.A.,
The question raised here is whether an action based on a breach of a qmsi-fiduciary duty should be analogized to an action based on breach of a fiduciary duty and thus be treated as an exception to the American rule. We find significant and dispositive distinctions between the quasi-fiduciary duty of an insurer and the duty of a true fiduciary, and conclude that the exception does not apply.
In Trimble II we held that the quasi-fiduciary duty of an insurer toward an insured stems specifically from the insurer’s control over the defense of actions brought against the insured by third parties. Trim-ble II,
Furthermore, even in the context of defending a third party lawsuit, the relationship between an insurer and an insured falls short of a true fiduciary relationship. An insured can regain some control over her defense by retaining independent counsel, either at her own cost and expense or by later suing the insurer for collection of those fees. Trimble II,
The insurer-insured relationship is a contractual one, created for the mutual benefit of the parties. The insured retains some responsibilities for, and control over, decision-making that distinguish the relationship from one of a true fiduciary nature. To hold otherwise would be to deprive both the in
B.
In addition to finding a quasi-fiduciary relationship between the insurer and the insured, Trimble II found an implied covenant of good faith and fair dealing in every insurance contract. Trimble II,
Bernhard argues that, based on Trimble II, good faith and fair dealing is a benefit of her insurance contract, and that the language in Trimble III allows recovery of attorney fees whenever an insured reasonably hires an attorney to obtain benefits of the contract. We disagree with both steps of Bernhard’s argument.
First, we disagree with her assertion that good faith and fair dealing is a benefit of the insurance contract. Trimble II imposes a legal duty on an insurer to deal with its insured in good faith. Trimble II,
We also disagree with Bernhard’s contention that Trimble III allows recovery of attorney fees when any benefit of a contract has been denied. Trimble III holds, in pertinent part, that expenditure of attorneys’ fees in defending a third party tort action could serve as the economic loss from which emotional distress damages resulted. In so holding, the court of appeals states ‘When an insured is reasonably compelled to hire an attorney to obtain benefits tortiously denied by his insurer, the attorney fees so incurred constitute economic loss caused by the tort and are recoverable as damages.” Trimble III,
We disapprove this particular language in Trimble III and its reliance on Brandt. The Brandt case stands for a much broader exception than we choose to adopt in this ease. Brandt concerned an insured who was injured in an accident. The insured made a demand upon the disability insurer for payment of benefits, but the insurer unreasonably refused to pay. Brandt v. Superior Court,
The reasoning employed by the Brandt majority in allowing the claim for attorney fees to stand was as follows: if the insurer’s tortious conduct compelled the insured to retain an attorney to obtain benefits due under the contract, then the attorney fees would be recoverable damages proximately caused by the tort. Brandt,
We find the dissent in Brandt persuasive in reasoning that if recovery were allowed for attorney fees stemming from a suit to enforce any wrongful withholding of benefits under an insurance contract, this would effectively swallow the entire American rule on attorney fees. Brandt,
Therefore, even if Bernhard were correct in submitting good faith and fair dealing to be a benefit of the contract, attorney fees incurred in her action against Farmers to obtain good faith and fair dealing are a consequence of, or are incidental to, her claim and are not recoverable.
III.
In conclusion, we hold that Bernhard’s claim for attorney fees incurred in bringing a bad faith breach of insurance contract action does not fit into any exception to the American rule recognized in Colorado. Furthermore, we decline to carve out an additional exception since we find no principled way to create such an exception while still upholding the general principles of the American rule. We therefore conclude that an insured must bear the cost of attorney fees incurred in bringing a bad faith breach of insurance contract action. We affirm the court of appeals and remand the case for further proceedings consistent with this opinion.
Notes
. Farmers also informed Bernhard that she had the right to retain her own attorney to assist in her defense, which she then did. However, in the case before us Bernhard is not seeking reimbursement for the money she spent in retaining counsel to aid in her defense against the underlying personal injury action. Instead, the only attorney fees at issue here are the fees she incurred in bringing the bad faith breach of contract claim.
. Attorney fees are addressed in Title 13, Article 17 of the Colorado Revised Statutes. Under this statutory scheme, a trial court has the discretion to award attorney fees if the bringing or defense of an action has been "substantially frivolous, substantially groundless, or substantially vexatious." § 13-17-101, 6A C.R.S. (1987). In addition, Colorado’s rules of civil procedure also authorize the award of attorney fees .' in specific circumstances. These rules are discussed in Bunnett v. Smallwood,
. Exceptions to the American rule recognized in Colorado include those based on: the "common fund” doctrine, County Workers Compensation Pool v. Davis,
In this last exception, the fees incurred by the wronged party in the third party suit may be recovered in a later action against the wrongdoer, whereas the fees incurred in bringing the actual action against the wrongdoer are not recoverable. This exception encompasses attorney fees arising out of a variety of actions including: a quiet title action, Elijah v. Fender,
An additional exception is recognized in Bunnett v. Smallwood,
. Paine, Webber, Jackson and Curtis, Inc. v. Adams,
Dissenting Opinion
dissenting:
The majority affirms the judgment of the Colorado Court of Appeals, which set aside an award of attorney fees incurred in an action by an insured against her insurer for bad faith breach of an insurance contract. Maj. op. at 1286; see Bernhard v. Farmers Ins. Exch.,
I.
I will briefly set forth the facts of this case.
After an accident in which Bernhard was responsible for injuring two persons, Farmers provided Bernhard with an attorney to defend her against the claims of the injured persons. The claimants made two separate time-limited offers to settle their claims against Bernhard. The first offer was within the applicable policy limits, and the second was for $30,000 more than the policy limits. After a jury trial, the jury awarded the injured persons amounts substantially in excess of the policy limits, resulting in an excess judgment against Bernhard.
Subsequently, Bernhard agreed with the injured persons to pursue a bad faith claim against Farmers, seeking the amount of the excess judgment as damages. If Bernhard were to recover, the injured persons would receive the portion of the recovery necessary to satisfy the excess judgment and Bernhard would keep any of the recovery above that amount.
After the trial on the bad faith breach claim, Bernhard received an award that included attorney fees. Bernhard agreed with Farmers that the jury’s verdict could not include attorney fees and sought a court order awarding such fees. After a hearing, the trial court awarded Bernhard $32,000 for attorney fees incurred in pursuing her bad faith claim against Fanners. The court of appeals reversed, and we granted certiorari. The majority now affirms the court of appeals.
II.
We follow the American rule, which recognizes that in the absence of a statute, court rule, or private contract to the contrary, attorney fees generally are not recoverable by the prevailing party in either a contract or tort action. Bunnett v. Smallwood,
A.
The Trimble line of cases involved a third party personal injury action against the insured, Trimble. The insurance company, Farmer’s Group, Inc., provided legal counsel to defend Trimble in the third party suit but subsequently filed a declaratory judgment action against Trimble to determine whether Trimble’s policy covered one of the claims. Trimble I,
In arriving at our decision in Trimble II, we held that “[t]he standard of conduct on the part of the insurer when dealing with claims arising under an insurance policy is shaped by, and must reflect, the quasi-fiduciary relationship that exists between the insurer and the insured by virtue of the insurance contract.” Id. at 1141. We stated: “Particularly when handling claims of third persons that are brought against the insured, an insurance company stands in a position similar to that of a fiduciary.” Id. We reasoned that this is so because under the insurance contract, “the insurer retains the absolute right to control the defense of actions brought against the insured, and the insured is therefore precluded from interfering with the investigation and negotiation for settlement.” Id.
The issue now before us is whether an insured can recover attorney fees incurred in successfully pursuing a bad faith breach of insurance contract claim against an insurer. As the majority recognizes, attorney fees may be awarded to a successful plaintiff in an action for breach of fiduciary duty, as an exception to the American rule. Buder v. Sartore,
The majority asserts that the insurer lacks any control over many aspects of its relationship with the insured and therefore the majority “refrain[s] from characterizing the insurer/insured relationship as quasi-fiduciary for all purposes.” Maj. op. at 1289. This statement creates confusion regarding the nature of the quasi-fiduciary relationship and I believe misconstrues the term as intended by this Court in Trimble II. The relevant context for consideration of the relationship of insurer and insured for purposes of the present ease is the defense of third party claims against the insured. In this context, the analogy of the relationship of insurer and insured to a fiduciary relationship is at its strongest. This is because of the degree of control ceded to the insurer by the insured pursuant to the insurance contract in conducting such defense. The fact that in other aspects of their relationship the insurer may have no such duty to its insured is not relevant for the purpose of the present case.
In refusing to recognize an analogy to a fiduciary relationship, the majority determines that the relationship between the insurer and the insured is simply a contractual relationship. See Maj. op. at 1289. However, I believe two important distinctions exist in this type of contractual relationship. First, we have recognized the disparity of control between the contracting parties in the insurance contract as contrasted with that existing in other contractual relationships. Trimble II,
In Rawlings v. Apodaca, the court determined that an insurer violates the covenant of good faith and fair dealing when, for the purpose of protecting its own interests, it does not act with equal consideration, fairness and honesty to avoid depriving the insured “of the very security for which he bargained or expos[ing] him to the catastrophe from which he sought intervention.” Id.,
In the context in which the quasi-fiduciary duty applies, the insurer must act in good faith and take the interests of the insured into account in its conduct of the defense and of settlement negotiations. See Trimble II,
Because a breach of a fiduciary duty is a recognized exception to the American rule, I likewise would include breach of the heightened duty associated with the quasi-fiduciary relationship of an insurance contract as an exception to the American rule that generally bars the recovery of attorney fees in a contract or tort action.
B.
The majority opinion disagrees with Bern-hard’s assertion that good faith and fair dealing is a benefit of her insurance contract and that the language in Trimble III allows recovery of attorney fees whenever an insured reasonably hires an attorney to obtain the benefits of such contract. Maj. op. at 1290.
Trimble III was an appeal by the insurer following a verdict for Trimble on his claim for bad faith breach of insurance contract following our remand in Trimble II. The court of appeals recognized that the damages for emotional distress at issue on appeal could be awarded only if sufficient economic loss was also established. The court held that the attorney fees incurred by the insured “to obtain the benefits tortiously denied by his insurer ... constitute economic loss caused by the tort and are recoverable as damages.” Trimble III,
Brandt involved an action by an employee who was a beneficiary of a group disability policy provided by his employer. The employee became totally disabled, but the insurance carrier refused to pay any benefits. The employee filed a complaint, alleging both a contract claim, seeking to be paid the benefits due under the policy, and a tort claim, seeking additional damages based upon the insurer’s breach of the covenant of good faith and fair dealing. The court in Brandt held
Similarly, in Trimble III, the court of appeals determined that attorney fees are proper damages where the insured “is reasonably compelled to hire an attorney to obtain benefits tortiously denied by his insurer” because these fees “constitute economic loss caused by the tort and are recoverable as damages.” Trimble III,
III.
For the foregoing reasons I respectfully dissent and would reverse that part of the judgment of the Colorado Court of Appeals that reversed the trial court’s award of attorney fees for the bad faith breach of the insurance contract.
. The majority opinion has a more lengthy rendition of the facts. See maj. op. at 1286-1287.
. A listing of some exceptions to the American rule recognized in Colorado is set forth in the majority opinion. Maj. op. at 1287 n. 3.
. In dicta, various courts have recognized the existence of a fiduciary relationship between the insurer and the insured under the provisions of the policy that impose upon the insurer the obligation of exercising good faith in negotiating for and effecting a settlement of a claim against its insured. See Baxter v. Royal Indem. Co.,
[W]hen the insured is sued by a third party, the insurance company takes over the defense of the suit and the insured cannot settle the matter without the permission of the insurer. It is this control of the litigation by. the insurer coupled with differing levels of exposure to economic loss which gives rise to the 'fiduciary’ nature of the insurer's duty.
Id. at 569.