FOREMOST INSURANCE COMPANY v. Robert LEVESQUE et al.
2007 ME 96
Supreme Judicial Court of Maine
July 26, 2007
926 A.2d 1185
Decided: July 26, 2007.
James E. Fortin, Esq. (orally), Douglas, Denham, Buccina & Ernst. P.A., Portland, for plaintiff.
Wenonah M. Wirick, Esq. (orally), Law Office of J. Michael Conley, PC, Bath, for defendant.
Panel: SAUFLEY, C.J., and CLIFFORD, ALEXANDER, CALKINS, LEVY, SILVER, and MEAD, JJ.
Majority: SAUFLEY, C.J., and CLIFFORD, ALEXANDER, CALKINS, LEVY, and SILVER, JJ.
Dissent: MEAD, J.
[¶ 1] The question in this case is whether Robert Levesque is entitled to an award of attorney fees because he prevailed in this declaratory judgment action brought by his insurance company. In Foremost Insurance Co. v. Levesque (Foremost I), 2005 ME 34, 868 A.2d 244, we affirmed the judgment declaring that Foremost Insurance Company had the duty to indemnify Levesque for a personal injury claim arising from an incident on Levesque‘s property. Foremost now appeals from a judgment entered in the Superior Court (Cumberland County, Cole, J.) ordering Foremost to pay Levesque‘s attorney fees for his defense in this action. Foremost contends that it is not liable for Levesque‘s attorney fees in the declaratory judgment action because it fulfilled its duty to defend Levesque against the personal injury claim. We affirm the judgment.
I. BACKGROUND
[¶ 2] The facts of the incident that gave rise to the personal injury claim against Levesque are set forth in Foremost I. Foremost retained an attorney to defend Levesque in the underlying personal injury action under a reservation of the right to deny coverage. When Foremost filed the declaratory judgment action the retained attorney in the underlying case advised Levesque to hire other counsel to defend the new case, and Levesque hired an attorney to represent him in the declaratory judgment action.1
[¶ 4] Levesque then moved in the declaratory judgment action for an order requiring Foremost to reimburse him for the amount expended on attorney fees defending against Foremost‘s claim that it had no duty to indemnify. The court ordered Foremost to pay Levesque‘s attorney fees, and Foremost appealed.2
II. DISCUSSION
[¶ 5] We review an award of attorney fees from an insurer to an insured de novo. Me. Mut. Fire Ins. Co. v. Gervais, 1999 ME 134, ¶ 6, 745 A.2d 360, 362. Whether the court has authority to award attorney fees is a matter of law. Gibson v. Farm Family Mut. Ins. Co., 673 A.2d 1350, 1354 (Me.1996).
[¶ 6] This declaratory judgment action is a contract dispute. It asked the court to determine whether the insurance contract required Foremost to indemnify Levesque for the personal injury claim against him. Generally, the prevailing party in a breach of contract action is not entitled to attorney fees absent a provision in the contract requiring payment of such fees. Id. The so-called American Rule provides that parties are responsible for their own attorney fees absent a statutory or contractual provision stating otherwise. Union Mut. Fire Ins. Co. v. Town of Topsham, 441 A.2d 1012, 1017 (Me.1982). However, with respect to insurance contracts, we have declared that an insurer may be liable for an insured‘s attorney fees in a declaratory judgment action in which the insured or the insurer seeks to establish the insurer‘s duty to defend and a comparison of the complaint with the policy demonstrates potential liability within the coverage of the policy. Gibson, 673 A.2d at 1354-55; Union Mut. Fire Ins. Co., 441 A.2d at 1019.
[¶ 8] We have not previously determined whether an insurer is liable for the insured‘s attorney fees when the insured has to defend against the insurer‘s suit seeking a declaration that there is no duty to indemnify. Section
[¶ 9] While it may be possible to interpret “duty to defend” in section
[¶ 10] In Gibson, we spoke of the “special relationship between insurer and insured” and the heavy burden that can fall on an insured when the insurer unsuccessfully forces the insured to defend a declaratory judgment action. Gibson, 673 A.2d at 1354. We said that the insured should be “place[d] . . . in a position equally as good as the insured would have occupied had the insurance contract been fully and properly performed from the beginning.” Id. at 1355. The same reasons that support the assessment of attorney fees in a duty to defend action also support the assessment of fees in a duty to indemnify action.
[¶ 11] Foremost contracted with Levesque to defend and pay claims against him for personal injuries occurring on his property. When such a claim was made against Levesque, Foremost properly hired an attorney to defend Levesque, but while that underlying case was pending, Foremost sought a declaration that it did not have to pay any claim. If Levesque had not defended against that declaratory judgment action, a default judgment would have issued against Levesque, and Foremost would have prevailed even though it was responsible under the insurance contract to indemnify Levesque. Levesque chose to contest the declaratory judgment action and to hire an attorney to do so. Levesque‘s decision to hire an attorney allowed him to prevail in the declaratory judgment case and obtain a judgment stating that Foremost had a duty to indemnify Levesque. Although the insurance policy required Foremost to pay the personal injury claim, Levesque incurred a substantial attorney fee to obtain this result and through no fault of his own. Unless we extend the common law exception to the American Rule that we developed in Gibson and Union Mutual to include duty to indemnify actions, Levesque‘s contractual right is substantially diminished.
[¶ 12] There is no dispute that a declaratory judgment action to determine a duty to defend places an onerous burden on the insured and that the prospect of having to pay attorney fees makes the insurance company appropriately cautious. Levesque‘s position in this case is as onerous as that of an insured who is initially met
[¶ 13] A distinction between duty to defend cases and duty to indemnify cases is that duty to defend cases involve the comparison of the policy with the alleged facts of the complaint whereas duty to indemnify cases involve the comparison of the policy with the facts proved at trial. See York Ins. Group of Me. v. Lambert, 1999 ME 173, ¶¶ 4-5, 740 A.2d 984, 985. That distinction is not relevant here. As discussed above, Foremost sought a declaration of its duty to indemnify while the underlying personal injury suit was pending and before the facts were proved. To the extent that there is a difference between the two cases because the duty to indemnify is narrower than the duty to defend, that difference is not significant when the duty to indemnify action is brought before judgment in the underlying case and when, as here, it essentially stops the underlying case. Just as the prevailing insured in the duty to defend action loses a substantial benefit of the insurance when he is sued by the insurer, the prevailing insured in the duty to indemnify action loses the benefit of his bargain with his insurer when he has to pay an attorney to defend him against the insurer.
[¶ 14] We recognize that most states deciding this issue have not deviated from the American Rule for either the duty to defend or duty to indemnify declaratory judgment actions.3 Indeed, we noted in Union Mutual that more states had denied attorney fees to insureds than had allowed the recovery of fees. 441 A.2d at 1018. Nonetheless, we decided to join the minority of jurisdictions who allowed fees. Id. at 1019.
[¶ 15] There are several jurisdictions that allow attorney fees when an insured defends a declaratory judgment action brought by the insurer. These jurisdictions have extended the right to recover attorney fees because the “disparity of bargaining power between an insurance company and its policyholder makes the insurance contract substantially different from other commercial contracts.” Olympic S.S. Co. v. Centennial Ins. Co., 117 Wash. 2d 37, 811 P.2d 673, 681 (Wash.1991). A West Virginia case noted that the insured purchased her policy to protect herself from future litigation, not to incur “vexatious, time-consuming, expensive litigation with [her] insurer.”4 Hayseeds, Inc. v. State Farm Fire & Cas., 177 W.Va. 323, 352 S.E.2d 73, 79 (1986).
[¶ 17] We are persuaded that we should extend the rule announced in Union Mutual and Gibson to declaratory judgment actions by an insurer seeking a declaration that it has no duty to indemnify. When an insured prevails after incurring legal fees to defend a suit brought by its insurer, policy reasons support the allowance of attorney fees to the insured. Unsuccessful litigation filed by an insurer against its insured subjects the insured to significant costs that may render victory for the insured on the indemnification issue meaningless. In that case, the insured will be in no better position than he would be without having purchased insurance.
[¶ 18] Because Levesque incurred attorney fees when he successfully defended against Foremost‘s declaratory judgment action on the duty to indemnify, the Superior Court properly awarded Levesque attorney fees.5
The entry is:
Judgment affirmed.
MEAD, J., dissenting.
[¶ 19] It is well established that with respect to the payment of attorney fees, Maine follows the so-called American Rule, which provides that litigants generally bear the expense of their own attorney fees in the absence of specific statutory authority, court-created exceptions, or contractual provisions to the contrary. See Soley v. Karll, 2004 ME 89, ¶ 10, 853 A.2d 755, 758 (citation omitted). We have previously carved out an exception to this Rule by allowing an insured to recover attorney fees accumulated in the successful defense of a declaratory judgment action brought by the insurer seeking a judicial ruling on its duty to defend pursuant to the terms of the insurance contract. Gibson v. Farm Family Mut. Ins. Co., 673 A.2d 1350, 1354-55 (Me.1996); Union Mut. Fire Ins. Co. v. Town of Topsham, 441 A.2d 1012, 1019 (Me.1982). The Legislature has codified this Rule in
[¶ 20] Title
[¶ 21] The award of attorney fees to a prevailing insured in a duty to defend declaratory judgment action is wholly appropriate given the sui generis nature of such litigation. The scope of an insurer‘s duty to defend is broad and is determined merely by comparing the allegations in the underlying complaint with the provisions of the insurance policy. Found. for Blood Research v. St. Paul Marine & Fire Ins. Co., 1999 ME 87, ¶ 4, 730 A.2d 175, 177. Accordingly, duty to defend declaratory judgment actions are inevitably legal “long shots” for the insurer with almost certain results. Although the commencement of such a declaratory judgment action by an insurer does not ipso facto demonstrate bad faith, it is often a dubious proposition that almost always inflicts upon the insured an onerous financial burden. Such actions are not to be commenced lightly; the specter of attorney fees creates an appropriate cause for reflection and reconsideration.
[¶ 22] Declaratory judgment actions seeking to clarify the duty to indemnify are fundamentally different from duty to defend cases because they rest upon a comparison of the policy to the actual facts of the case, as proved at a trial. See York Ins. Group of Me. v. Lambert, 1999 ME 173, ¶ 5, 740 A.2d 984, 985. It is well settled that an insurer‘s duty to indemnify is much narrower than its duty to defend. Id. Unlike duty to defend actions, it is often difficult to predict the fact-driven outcome of the duty to indemnify case prior to hearing. Although a duty to defend action may be presumptively ill-founded upon its face, the same cannot be said of duty to indemnify actions.7
[¶ 24] The Court maintains that an insured loses a substantial benefit of the insurance policy when he is forced to defend a declaratory judgment action. However, the same can be said of virtually any contract and subsequent litigation regarding its terms. Where the parties to a contract face a bona fide dispute over the obligations and benefits created by its terms, the Declaratory Judgments Act,
[¶ 25] The Court admonishes the insurance industry, stating that declaratory judgment actions addressing issues of coverage should not be brought (or should be stayed) while an underlying action is pending. Such an approach avoids duplicative demands on limited judicial resources and unnecessary legal expenses to insureds. Although the Court‘s guidance is well taken, there are instances where the insurer and the insured both have a significant interest in having coverage questions answered definitively before a final judgment is entered on the underlying claim. If it is determined prior to trial that the insurance policy does cover the claim, the insurer will have a powerful motivation to settle the claim early—a motivation that might not be present if the insurer strongly believes that there is no coverage. In addition, a definitive ruling prior to trial that coverage is lacking would save an insured from the unpleasant surprise—months after verdict—that he or she is personally liable for the judgment. As such, I cannot view the commencement of a declaratory judgment action addressing the duty to indemnify with the same jaundiced eye that I might turn to a duty to defend action.
[¶ 26] If a duty to indemnify action is commenced without a good faith basis purely to oppress an insured, clearly the body of insurance law dealing with bad faith may be appropriately invoked. In such circumstances, the insured would be able to recover consequential damages10
Notes
Hayseeds, Inc. v. State Farm Fire & Cas., 177 W.Va. 323, 352 S.E.2d 73, 78 (1986) (citation omitted).Although the disparity of bargaining power between company and policyholder (often exacerbated by the dynamics of the settlement bureaucracy) make insurance contracts substantially different from other commercial contracts, efforts to provide greater balance have been halting at best, and have often depended upon fictions such as lack of “good faith” to circumvent general prohibitions against fee-shifting. The unstructured and nebulous nature of the rules concerning good faith settlement of policy claims in property damage cases is directly related to the American rule that both sides of a civil controversy must pay their own attorneys’ fees—win, lose, or draw. In many social contexts this rule makes eminently good sense . . . . However, the fact that the general rule concerning fees works well most of the time does not necessarily imply that the rule works well all of the time.
1. Civil actions. A person injured by any of the following actions taken by that person‘s own insurer may bring a civil action and recover damages, together with costs and disbursements, reasonable attorney‘s fees and interest on damages at the rate of 1 1/2% per month:
A. Knowingly misrepresenting to an insured pertinent facts of policy provisions relating to coverage at issue;
B. Failing to acknowledge and review claims, which may include payment or denial of a claim, within a reasonable time following receipt of written notice by the insurer of a claim by an insured arising under a policy;
C. Threatening to appeal from an arbitration award in favor of an insured for the sole purpose of compelling the insured to accept a settlement less than the arbitration award;
D. Failing to affirm or deny coverage, reserving any appropriate defenses, within a reasonable time after having completed its investigation related to a claim; or
E. Without just cause, failing to effectuate prompt, fair, and equitable settlement of claims submitted in which liability has become reasonably clear.
2. Without just cause. For the purposes of this section, an insurer acts without just cause if it refuses to settle claims without a reasonable basis to contest liability, the amount of any damages or the extent of any injuries claimed.