Lead Opinion
This is а review of the circuit court's decision and judgment against Badger State Mutual Casualty Company (Badger State) in the amount of $159,000. In a decision filed on May 23,1984, the circuit court for Waukesha county, Robert T. Mc-Graw, circuit judge, held that Badger State breached its contract and committed bad faith in refusing to defend its insured and in refusing to settle the third-party claim of victim Bradley Mowry within the liability limits of an insurance policy. We reverse the judgment of the circuit court.
This case comes to us on certification from the court of appeals, district II, pursuant to sec. (Rule) 809.61, Stats.
The historical facts of this case are undisputed. On May 3,1975, Bradley Mowry, then age 19, was injured in an automobile accident and suffered serious bodily injury, including the amputation of part of one foot. He
Upon being notified of the accident, Badger State began to investigate the circumstances surrounding the accident. The claims manager for Badger State, John Graeber, concluded after reading the police report and interviewing all of the automobile’s occupants that the case was one of probable liability on McCarthy's part. He also determined that the case would probably involve damages to Mowry in excess of the $16,000 policy limits.
Badger State's investigations indicated to it, however, that a question of policy coverage existed. The question revolved around the ownership of the vehicle which McCarthy was driving at the time of the accident. The insurer believed that it was unclear whether McCarthy or his parents were the true owners of the automobile involved in the accident. Its investigation disclosed that the car was titled in McCarthy's mother's name, but that McCarthy had paid for the car with his own money, did not need permission to drive the car, and had told several people at the scene of the accident that he owned the vehicle and that it was uninsured. Given these circumstances, Graeber concluded that the issue of ownership was debatable and that a serious question of coverage had arisen.
In March, 1976, ten months after the accident, Mowry filed suit against McCarthy, McCarthy's parents, Badger State, and an insurance agent. In its answer dated March 2,1977, Badger State denied any cov
On September 13,1977, Mowry issued a formal demand of settlement for the full amount of the liability insurance coverage, $15,000. Badger State's attorney, Kurt Frauen, responded that Badger State had denied coverage under the policy, but that he would inform Badger State of the offer. Badger State did not accept the offer.
At a pretrial conference on September 26, 1977, Attorney Frauen requested that Mowry's counsel and other parties present agree to a bifurcated trial in which a determination on coverage would precede any trial on the issue of liability. In relating the events of the pretrial conference to Badger State, Attorney Frauen wrote, "Everyone seemed to feel that if the coverage issue were resolved, the rest of the case would not have to be tried." Mowry's counsel reiterated Mowry's offer of settlement on September 26,1977, but Badger State again refused to accept it.
A subsequent stipulation and order set April 4, 1979, as the commencement date for the trial on the issue of coverage; the issues of liability and damages were to be held in abeyance until the resolution of the coverage issue. On March 12, 1979, approximately three weeks before the coverage trial, Mowry once more demanded that Badger State pay the limits of McCarthy's liability insurance policy plus $1,000 under the medical payments coverage; he set a March 23, 1979, deadline for its acceptance. Badger State's counsel, in correspondence to Mowry's counsel, stated that he felt the settlement demand was contrary to the
Badger State refused Mowry's March 12 settlement offer. On April 4, 1979, the coverage issue was tried before a jury. The jury returned a verdict the next day which found that McCarthy's parents owned the vehicle in question at the time of the accident. Coverage was thereby afforded Steven McCarthy under the policy.
On April 6, 1979, Badger State offered the limits on its liability policy and medical payments coverage. On January 10,1980, Badger State's counsel informed McCarthy that it would assume McCarthy's defense in the action. Following negotiations between counsel for Mowry and Badger State, the parties entered into a stipulation of judgment in October, 1980, thereby rendering a trial on the liability and damages issues unnecessary. Thе judgment was in favor of Mowry and against Badger State for $16,000 and against Steven McCarthy for $175,000. The stipulation further called for McCarthy to assign to Mowry any and all causes of action which McCarthy might have against Badger State, in satisfaction of Mowry's judgment against McCarthy. Following that stipulation and entry of judgment, Mowry, suing under McCarthy's assignment of rights, brought the present action against Badger State for bad faith and breach of contract.
Badger State appealed. The court of appeals, in its certification memorandum, framed the issue to be whether an insurance carrier "should be held liable for damages in excess of its policy coverage where its belief that there was no coverage led it to reject" an earlier offer of settlement within the policy limits. The court noted that this particular scenario presents an unaddressed area of insurance law in this state.
We note the competing interests on each side of this case. When an insurer is certain of its insured's liability for an accident and where damages to the victim exceed policy limits, the insurer would normally be responsible for indemnifying its insured to the extent of its policy limits. The insurer, however, experiences a conflict of interests whenever an offer of settlement within policy limits is received where a legitimate question of coverage under the policy also exists. See, Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv. L. Rev. 1136 (1954). See also, Hilker v. Western Automobile Ins. Co.,
BAD FAITH CLAIM
An insurer owes a general duty to its insurеd to settle or compromise a claim made against the insured. Hilker,
The insurer has the right to exercise its own judgment in determining whether a claim should be settled or contested. But "exercise of this right should be accompanied by considerations of good faith." Id. at 14. In order to be made in good faith, a decision not to settle a claim must be based on a thorough evaluation of the underlying circumstances of the claim and on informed interaction with the insured. This gives rise to several obligations on the part of the insurer. First, the insurer must exercise reasonable diligence in ascertaining facts upon which a good-faith decision to settle or not settle must be based. Second, where a likelihood of liability in excess of policy limits exists, the insurer must so inform the insured so that the insured might properly protect himself. Id. at 15-16. Third, the insurer must keep the insured timely abreast of any settlement offers received from the victim and of the progress of settlement negotiations. Baker v. Northwestern Nat. Casualty Co.,
To support his argument, Mowry cites cases from other jurisdictions which ostensibly are on point. In Luke,
The Eighth Circuit Court of Appeals found that the insurer refused to settle and refused to defend and, therefore, had breached its contract with the insured. Good faith, the court found, is irrelevant to a breach of contract action. "When an insurer refuses to defend and, additionally, refuses to accept a reasonable settlement within the policy limits, the company's liability for damages may be measured as well by its rejection of the offer' to settle and may thus exceed the policy limits." Id. at 1020.
We do not find Luke to be persuasive in the present situation. First, in this case there was no breach of contract for failure to defend (for reasons which will be discussed below) as there was in Luke. Good faith, although of no importance in breach of contract actions, is a consideration in actions claiming a breach of the duty to settle, which arises out of fiduciary principles. Alt,
Mowry also cites Comunale v. Traders & General Ins. Co.,
"When there is great risk of a recovery beyond the pоlicy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured's interest requires the insurer to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing."50 Cal. 2d at 659 ,328 P.2d at 201 .
That court then held the insurer liable for the excess judgment entered against the insured, representing the insured's damages for breach of the duty to settle.
The Comunale rule, in effect, renders an insurer strictly liable for any decision not to settle within policy limits, whether or not made in good faith, when a subsequent judgment against the insured exceeds policy limits:
” 'An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be*514 wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer's breach of the express and implied obligations of the contract.50 Cal. 2d at 660 ,328 P.2d at 202 .'" Johansen v. California State Auto. Assn. Inter-Ins. Bureau,15 Cal. 3d 9 , 15,538 P.2d 744 ,123 Cal. Rptr. 288 (1975).
In Johansen, the California court further explained the upshot of its strict liability approach:
"[T]he only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim's injuries and the probable liability of the insured, the ultimate judgment is likely to exceеd the amount of the settlement offer. Such factors as the limits imposed by the policy, a desire to reduce the amount of future settlements, or a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one."15 Cal. 3d at 16 ,538 P.2d at 748-49 .
Although we acknowledge the apparent goal of the California approach — to protect the insured from liability for an excess judgment by placing the risk of an erroneous decision not to settle on an insurer — we decline to accept that strict approach for this jurisdiction. Such a policy is unduly oppressive on insurance companies and would force them to settle claims where coverage may be dubious. The California approach is particularly unseemly in a jurisdiction such as our own, where an insurer may seek judicial determination of coverage issues prior to litigating liability and damages issues. See, sec. 803.04(2)(b), Stats. The California approach is unrealistic if only to the extent that an insurer's belief that an insurance policy does or does not
We have held that an insurer has a right to exercise its own judgment in deciding whether to settle or contest a claim, within parameters of good faith considerations. Hilker,
Bad faith in deciding to litigate rather than settle a claim involves more than a mere finding of negligence on the part of the insurer. Warren v. American
In Anderson, a first-party claim case, this court held that an insurance company may challenge claims which are fairly debatable.
"To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim." Id. at 691.
An insurer will have committed the tort of bad faith only when it has denied a claim without a reasonable basis for doing so, that is, when the claim is not fairly debatable.
This court has held that in third-party claim situations, it is not bad faith for an insurer to refuse to settle a victim's claim "under the bona fide belief that the insurer might defeat the action. . . ." Johnson,
We hold that the circuit court erred in finding in this case that Badger State committed bad faith by refusing to settle and negotiate а settlement within policy limits. A finding of bad faith must not be measured solely against a backdrop that coverage was ultimately found to exist under the policy. Bad faith should be found in this case only if there was no fairly debatable coverage question. However, the circuit court, sitting without a jury, did not use this standard to reach its bad faith conclusion. The court concluded that Badger State's posture of waiting to defend the action and to negotiate a settlement until the coverage issue was determined itself constituted bad faith. Because the circuit court did not rely on appropriate and applicable law in making its bad faith determination, its holding is an abuse of discretion and, as such, is erroneous. See, Hartung v. Hartung,
The upshot of the trial court's holding would be to require the insurer to accept an offer within policy limits even where a fairly debatable coverage question exists. We have, however, rejected the California approach, which would make an insurer strictly liable for an offer of settlement within policy limits.
Although this court might otherwise remand a matter to the circuit court for further consideration where the appropriate law has not been applied, we choose to decide the bad faith issue as a matter of law.
Bad faith is a determination to be made by the trier of fact. Baker,
"[w]hen the principal facts in a case are undisputed and the controversy centers on what has been called ultimate conclusions of fact, or conclusions of law, this court has indicated it will not be bound by the findings of the trial court." Chicago, Milwaukee, St. Paul & Pacific R.R. Co. v. Milwaukee,47 Wis. 2d 88 , 96,176 N.W.2d 580 (1970).
Here, because the principal facts underlying the bad faith claim are undisputed and because there is only one reasonable inference, we may review the matter of bad faith аs a question of law without deference to the trial court or court of appeals.
Badger State's grounds for refusing the settlement offers within policy limits were that it did not believe that the car involved in the accident was owned by its insureds, McCarthy's parents. Badger State, therefore, concluded that the policy did not extend coverage to
Badger State responds that McCarthy did not need parental permission to operate the car, that McCarthy said at the accident site that the car was uninsured, and that MсCarthy's father told McCarthy to obtain insurance on the car. In addition, Mowry's counsel conceded during the underlying bad faith trial before Judge McGraw that evidence existed which presented a jury issue on coverage. Mowry's counsel stated:
"I'm willing to stipulate as I have always been that there was a jury issue on the question of coverage[,] period. As attempting to cloak it in the terms of the wise men to the west as being fairly debatable and so on, I object to, but your Honor, there is no question but what there was evidence which presented a jury issue on coverage."
Significantly, the original trial court bifurcated the liability and damages issues from the coverage issue and ordered that the issues of liability and damages be held in abeyance until the determination of the coverage issue. The court of appeals in its certification memo
We hold that Badger State did not act in bad faith in initially denying coverage to McCarthy. The record establishes a reasonable basis for Badger State's denial of coverage. Although the vehicle was registered in Mildred McCarthy's name, other items within the record suggest Steven McCarthy's ownership of the vehicle. Eugene McCarthy, Steven's father, stated that Steven paid for the car with money from Steven's own checking account, but that Eugene also "gave him some money." McCarthy apparently had approached his father about the idea of "buy[ing] the car" from a third party. Steven, according to the elder McCarthy, paid $150 for the car, but Mildred McCarthy's name appeared on the title. McCarthy never had to ask his father or mother for permission to use the car. Eugene McCarthy suggested that his son obtain insurance on the vehicle. In a statement made to a Badger State representative, McCarthy claimed that his mother owned the car on the date of the accident but that he had paid for it. One of the vehicle's pccupants on the date of the accident stated that McCarthy said at the accident scene that he owned the car and that it was uninsured.
Although the record itself does not conclusively establish that the vehicle in question was covered under the elder McCarthy's insurance policy (that task was undertaken and resolved by the jury in the coverage trial), the record sufficiently establishes that Badger State was presented with a fairly debatable coverage issue. There is no absenсe of a reasonable basis for Badger State's denial of coverage. The record gives no indication that Badger State failed to properly investigate
Badger State could have protected both its interests and its insured's interests by settling under a reservation of rights agreement, Mowry and the circuit court assert. The record reflects that Badger State's counsel and its claims manager considered such an option, but ultimately decided to pursue the bifurcation procedure. A reservation of rights agreement would result in a settlement of the injured's claims, while preserving the insurer's right to litigate the coverage issue. The insured benefits from this procedure because it is protected from excess judgment. Badger State argues, however, that the reservation of rights procedure will rarely result in the insurer's recouping the payments it made to the victim from the insured where coverage is found not to exist under the policy, because the insured may be judgment-proof.
An insurer is always at liberty to seek a reservation of its rights in settling a claim. But Badger State's failure to seek such a reservation in this case does not, by itself, constitute bad faith. Badger State merely sought a statutory mechanism to bifurcate the coverage issue from the liability and damages issues. To require an insurer to enter into a reservation of rights agreement in addition to proceeding within a separation framework would run contrary to the bifurcation allowed by sec. 803.04(2)(b), Stats. Even though Badger
Mowry argues that it is inherently unfair for McCarthy to be liable for a judgment in excess of policy limits when the judgment could have been wholly avoided had Badger State settled within policy limits when it had the opportunity to do so. But to require an insurer to settle any claim within policy limits where the insured's liability and the victim's damages in excess of policy limits are relatively certain, without consideration as to whether coverage exists, may result in extortionate lawsuits against the insurer. See, Anderson,
Mowry asserts that even if an insurer is granted a bifurcated trial under sec. 803.04(2)(b), Stats., an insurer's duties to its insured should not be suspended pending the outcome of the coverage trial. We agree. Section 803.04(2)(b), authorizes the trial court to sever and try issues separately, at its discretion. The statute does not on its face affect the rights and duties to a contract. As we mentioned above, however, the existence of coverage under a contract precedes an insurer's duty to settle. The precise reason an insurer litigates a coverage issue is to release itself from any settlement arid defense obligations. To require it to settle prior to the coverage trial is antithetical to the purpose of the bifurcation statute. Thus, the mere fact that an insurer refuses an offer to settle within policy limits during the pendency of a coverage trial does not mean that the insurer has breachеd a duty owed to its insured.
Mowry and the trial court point to language in Alt,
When the insured's liability for an accident is undisputed and damage clearly exceeds policy limits and yet the insurer seeks a separаte trial on a coverage issue, the insurer and insured may still interact to avoid an excess judgment against the insured. For example, Mowry's counsel extended several settlement offers to Badger State after a stipulation had been reached and after a separation order had been granted. Although Badger State's acceptance of any of Mowry’s offers would have been contrary to its decision to litigate the coverage issue — to be sure, a requirement that Badger State accept any such offers under penalty of bad faith would emasculate any benefit of the statutory separation procedure — Badger State still had the obli
Because the trial court held that Badger State committed bad faith in refusing to negotiate or settle a claim within its policy limits and did not apply the fairly debatable standard to the coverage question, the trial court erred as a matter of law. We hold that when a coverage issue is fairly debatable, an insurer will not have acted in bad faith in refusing to settle within policy limits, even when the insured's liability for the incident is undisputed and when the victim's damages appear to exceed policy limits. Because no determination was made that the coverage issue was fairly debatable, the circuit court abused its discretion in holding that Badger State acted in bad faith and in holding it liable for McCarthy's excess judgment.
Mowry contends that Badger State breached its contract with McCarthy in refusing to defend him in the action brought by Mowry. Such breach, when combined with a failure of a duty to settle, should result in liability to the extent of the insured's adverse judgment in excess of policy limits, he believes. Badger State argues that if it did breach its contractual duty, it should be liable for damagеs only to the extent of its policy limits.
The circuit court held that Badger State breached its contractual duty to defend McCarthy against Mowry's suit for damages. It essentially held that Badger State's refusal of a duty to defend coupled with its refusal to settle damaged McCarthy to the extent of McCarthy's liability in excess of the policy limits, in this case, $159,000.
Whether a party to a contract has breached a contractual obligation is a legal conclusion. "[W]here there is no ambiguity of expression, no dispute about the facts, and no uncertainty of meaning when the language is applied to the facts . . . the question is undoubtedly one of law for the court alone" to determine. Vilas v. Bundy,
It is undisputed that a liability insurer generally has a contractual duty to defend its insured in an action for damages. Gross v. Lloyds of London Ins. Co.,
"[T]he company shall, with counsel of its choice, defend any suit alleging such bodily injury or property damage and seeking damages which are payable under the terms of this policy, even if any of the allegations of the suit are groundless, false, or fraudulent. . . ."
We fail to see, based on the facts before us, how Badger State could be held to have breached its duty to defend McCarthy against suit brought by Mowry. Badger State initially denied coverage because it believed that coverage under the policy was fairly debatable. But it expressly assumed the defense of McCarthy on January 10,1980, after the coverage trial and after a jury determined that coverage existed. It thereafter negotiated a settlement with the claimant. One element of the settlement was that McCarthy would assign any rights of action he might have against Badger State to Mowry in consideration for the satisfaction of Mowry's judgment against McCarthy. Badger State also paid out the limits of its insured's policy in partial satisfaction of the settlement.
An insurer may need to provide a defense to its insured when the separate trial on coverage does not precede the trial on liability and damages. Section 803.04(2)(b), Stats., states that the court upon ordering separate trials "shall specify in its order the sequence in which such trials shall be conducted." Thus, we have noted that an insurer may be required to furnish a free
Badger State was not required to provide a free defense in this case because the coverage trial preceded a trial on liability and damages. And Badger State extended the defense it was contractually required to provide to its insured once there was a finding of policy coverage. Instead of providing counsel to defend against the victim's suit, Badger State's defense took the form of negotiating a settlement on behalf of Badger State's insured; the settlement included an assignment of rights in satisfaction of the excess damages award against McCarthy, thereby effectively shielding McCarthy from the effects of the excess liability. Badger State had no opportunity to defend its insured in a suit for damages, because a trial was rendered unnecessary by the settlement stipulation. There was no other suit in which Badger State could have defended its insured, but did not.
Because the prerequisite for a discussion of breach of contract damages is not present, we have no opportunity to discuss the proper measure of breach of duty to defend damages. The trial court erroneously held that Badger State breached its contractual duty to de
By the Court. — The judgment of the circuit сourt is reversed. The cause is remanded with directions to dismiss the complaint.
Notes
That statute provides:
"The supreme court may take jurisdiction of an appeal or other proceeding in the court of appeals upon certification by the court of appeals or upon the supreme court's own motion. The supreme court may refuse to take jurisdiction of an appeal or other proceeding certified to it by the court of appeals."
That statute provides:
"If an insurer is made a party defendant pursuant to this section and it appears at any time before or during the trial that there is or may be a cross issue between the insurer and the insured or any issue between any other person and the insurer involving the question of the insurer's liability if judgment should be rendered against the insured, the court may, upon motion of any defendant in the action, cause the person who may be liable upon such cross issue to be made a party defendant to the action and all the issues involved in the controversy determined in the trial of the action or any 3rd party may be impleaded as provided in s. 803.05. Nothing herein contained shall be construed as prohibiting the trial court from directing and conducting separate trials on the issue of liability to the plaintiff or othеr party seeking affirmative relief and on the issue of whether the insurance policy in question affords coverage. Any party may move for such separate trials and if the court orders separate trials it shall specify in its order the sequence in which such trials shall be conducted."
We reiterate that Mowry does not assert that Badger State failed to meet any of the obligations arising out of the duty to settle. See, Baker,
In many cases policy defenses are tried prior to the determination of the liability and damages issues. Iowa Nat. Mut. Ins. Co. v. Liberty Mut. Ins. Co.,
It would seem that, once an order to bifurcate has been made, a trial on a coverage issue should be a relatively simple matter. We, therefore, encourage a court which has ordered bifurcation to expedite the coverage issue by placing the trial on its calendar at an early date to assist in avoiding a needlessly protracted claim against the insured.
Concurrence Opinion
(concurring). I agree with the conclusion of the majority, but I write separately to emphasize that the duty to settle is not a contractual duty, as the dissent contends. Rather it is a fiduciary duty which only arises when the insurer assumes the exclusive management and control of the insured's defense. Because Badger State did not assume exclusive control of the management of the action against its insured, the insurer did not have a fiduciary duty to settle.
An insurer's duty to settle is not a contractual duty under the insurance policy in this case. The policy does not specify any such duty and this court has consistently held that the duty is not contractual in nature. In Hilker v. Western Automobile Ins. Co.,
In Anderson v. Continental Ins. Co.,
The distinction between a fiduciary duty to settle and a contractual duty to settle has not been inadvertently recognized. This court's decision in Ott v. All-Star Ins. Corp.,
"As stated above, an insurer's liability to his insured for tortious failure to settle within policy limits is 'extra-contractual.' Because such liability is not a risk against which protection is extended to the insured, it cannot, under the above definitions, be a proper subject for 'reinsurance.' By definition*532 such risk cannot be reinsured." Id. at 652. (Emphasis added.)
In light of this authority, and the other authorities cited above, there can be no question that the duty to settle is not a contractual obligation.
The only contractual obligations under this liability policy are thе duty to indemnify and the duty to defend. See Gross v. Lloyds of London Ins. Co.,
Badger State also did not breach the fiduciary duty to settle because that duty did not arise in this case until after Badger State assumed its insured's defense. The fiduciary duty to settle arises only when the insurer actually undertakes the management and control of an insured's case. The seminal case recognizing an insurer's duty to settle is Hilker. That case unequivocally bases such a duty on the fact of the insurer's exclusive control and management of the claim against the insured. The following passage from Hilker,
"In express terms the contract imposes no duty at all a breach of which makes the insurer liable to the insured for a failure to settle or compromise a claim. However, all courts are agreed that the insurer does owe to the insured some duty in this re*533 spect. This duty is impliеd as a correlative duty growing out of certain rights and privileges which the contract confers upon the insurer. By the terms of this contract the absolute control of the defense of such actions is turned over to the insurer, and the insured is excluded from any interference in any negotiations for settlement or legal procedure. It is generally understood that these are rights and privileges which it is necessary for the insurer to have in order to justify or enable it to assume the obligations which it does in the contract of insurance. So long as the recovery does not exceed the limits of the insurance, the question of whether the claim be compromised or settled, or the manner in which it shall be defended, is a matter of no concern to the insured. However, where an injury occurs for which a recovery may be had in a sum exceeding the amount of the insurance, the interest of the insured becomes one of concern to him. At this point a duty on the part of the insurer to the insured arises. It arises because the insured has bartered to the insurance company all of the rights possessed by him to enable him to discover the extent of the injury and to protect himself as best he can from the consequences of the injury. He has contracted with the insurer that it shall have the exclusive right to settle or compromise the claim, to conduct the defense, and that he will not interfere except at his own cost and expense. It is quite apparent that this right was given to the insurance company to induce it to enter into the contract of insurance, and that it is a necessary right to be possessed by it if it is to write the insurance upon the terms stipulated. It is a right to be exercised by the insurer in its own interest."
The Hilker decision then imposed two settlement related duties on insurers: (1) the insurer must make a
In Baker v. Northwestern Nat. Casualty Co.,
"In addition to the duties stressed in the Hilker Case there must be added a third duty which is imposed upon the insurer as a result of the insured's surrendering to it the sole control of all settlement negotiations, namely, that of keeping the insured timely and adequately informеd of any offers of settlement received from the claimant and of the progress of any settlement negotiations.” (Emphasis added.)
Finally, in Howard v. State Farm Mut. Automobile Ins. Co.,
"When, as here, the insurer undertakes and controls the defense of a claim against its insured, it has a duty not only to protect itself to the extent of its liability but it must act in good faith to protect the interest of its insured. If it fails to do so it is liable to its insured for the amount the insured required over and above the policy limits." (Emphasis added.)
The majority's conclusion does not cause the unfair result that the dissent claims. The dissent would resolve this case in favor of the insured solely on the basis that the insured cannot protect its own interests when the insurer refusеs to defend or settle and, therefore, it is unfair to make the insured bear the risk of a rejected settlement offer. In fact, the fundamental premise of the dissent is false. It is unquestioned that the insured has the authority to reasonably settle a claim against him where the insurer refuses to defend, despite any consent to settlement clause in the policy. The court resolved this question in United States Guarantee Co. v. Liberty Mut. Ins. Co.,
"The refusal of the defendant to perform its obligation to defend this action constituted such a breach of its contract as to release the assured or its sub-rogee from the condition contended for [the insurer's consent to settle]. In effect, it amounted to a waiver of this condition."
See also Patrick v. Head of Lakes Cooperative Elec. Ass'n.,
The refusal to defend gave the insured the right to settle, and, therefore, any excess judgment was not caused by the insurer's breach. The measure of contract damages in Wisconsin is the amount of the loss "which arise[s] 'naturally, according to the usual course of things,' from the wrong, and must be such as is ’reasonably to be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.'" Reiman Associates v. R/A Advertising,
I concur in the majority's decision.
Dissenting Opinion
(dissenting). The issue is who should bear the loss resulting from an insurаnce company's mistaken decision that its policyholder was not covered by the policy where: (1) the in
It does not seem fair to impose the loss on the policyholder. He did not write the policy, he did not control the progress of the litigation, and he was ultimately vindicated by the court's holding that he was covered by the policy. The insurance company made a mistake — an honest mistake — but a mistake nevertheless.
It also does not seem fair to impose the loss on the insurance company. The company reasonably believed that the policyholder was not covered. If the loss is placed on the company, insurance companies may be coerced into settling doubtful coverage cases. Insurance companies should not be forced to pay policy limits for matters they did not contract to insure. Thе companies' expenses of settling the "doubtful coverage" cases — which include noncoverage cases — will be borne by the policyholders in the form of ever-increasing premiums.
This is not an easy case. The majority puts the loss on the policyholder, holding that the insurance company should not bear the risk of its mistaken dispute of coverage. I would put the loss on the insurance company.
In determining who hears the loss we must remember we are dealing with an insurance contract. The policyholder buys insurance to avoid the risk of loss. The insurance company is in the business of evaluating
Imposing liability on the insurance company in this case comports with basic principles of contract law. As the majority recognizes, the insurance policy is a contract and the company has a contractual duty to defend the policyholder and to use reasonable good faith efforts to settle or compromise a claim against the insured. P. 510. The general rule is that a party who does not perform under the contract — even in a good faith belief that it need not perform under the contract — is responsible for losses resulting from the breach of the contract. In this case the company refused to pay policy limits and settle the claim because it had doubts about coverage. I would treat a company's refusal to pay based solely on the company's mistaken belief about coverage as a breach of contract and would apply the general rule of damages for this breach of contract. The insurance company must pay damages to put the policyholder in the same position he would have been in had the insurance company fulfilled the insurance contract.
Furthermore, the insurance company in some cases may be able to protect itself from liability for damages in excess of policy limits by litigating the coverage issue before a settlement offer is made. In this case the insurance company failed to litigate the issue of coverage promptly. The victim commenced the action within 10 months of the date of the accident. The insurance company answered the complaint a year later. The statutory time for answering is 20 days. Section 802.06 (1). The answer denied coverage under the policy. The insurance company did not request a bifurcated trial on the issue of coverage, sec. 803.04 (2)(b), until 6 months after its answer, and then only after the insurance company received an offer to settle within policy limits. A full year and a half had elapsed between the commencement of the action and the insurance company requested a separate trial on the issue of coverage. As the majority points out, pp. 507-508, were it not for the coverage issue, the insurance company surely would have accepted the offer to settle given the policyholder's liability for the accident and the nature of the damages. The insurance company might have been able to avoid getting itself into the predicament of turning down a settlement offer had it litigated cover
This case involves the conflicting interests of the policyholder, the insurance company, and the public. For the reasons set forth I conclude that in a case like this where liability and damages in excess of policy limits were undisputed, where the insurance company did not take steps to litigate the coverage question promptly, and where the insurance company erred in asserting that there was no coverage, the insurance company should be liable for damages for erroneously failing to pay policy limits and for erroneously failing to accept the offer of settlement.