TOWNE REALTY, INC., Jоseph Zilber, Donald Grande and Gerald Stein, Plaintiffs-Respondents, v. ZURICH INSURANCE COMPANY, Defendant-Appellant.†
No. 94–1743
Court of Appeals of Wisconsin
Submitted on briefs February 28, 1995.—Decided April 18, 1995.
534 N.W.2d 886
†Petition to review granted.
For the plaintiffs-respondents the cause was submitted on the brief of Michael R. Wherry and James E. Culhane of Davis & Kuelthau, S.C. of Milwaukee.
Before Cane, P.J., LaRocque and Myse, JJ.
MYSE, J. Zurich Insurance Company appeals a summary judgment concluding that it breached its duty to defend Towne Realty, Inc., Joseph Zilber, Donald Grande and Gerald Stein (Towne) against a suit brought by Joseph Balestrieri and Leslie West Balestrieri (Balestrieris) and awarding costs to Towne for attorney fees it incurred in defending the complaint. The amount of attorney fees to which Towne was entitled was determined following a contested hearing. Zurich contends that the trial court erred by granting Towne‘s motion for summary judgment because it did not have a duty to defend Towne against the Balestrieri complaint. Further, Zurich contends that it did not have a duty to defend Towne prior to January 2, 1992, because Towne‘s letter of October 21, 1991, was not a proper tender of defense. Finally, Zurich argues that even assuming that it did have a duty to defend Towne and that Towne properly tendered the defense on October 21, the trial court erred by awarding Towne attorney fees for: (1) legal expenses incurred prior to the time the Balestrieri complaint was tendered to Zurich on October 21; (2) legal expenses inсurred in prosecuting counterclaims against the Balestrieris
FACTS
In 1990, Towne Realty acquired a commercial general liability insurance policy from Zurich. Zilber, Grande and Stеin were covered under the policy pursuant to the “Named Insured Endorsement.” Under the terms of the policy, the plaintiffs were insured for liability that resulted from “bodily injury and property damage,” as well as “Personal and Advertising Injury Liability.” Zurich had a duty to defend the insureds for any suits covered by the terms of the policy.
On October 10, 1991, Joseph Balestrieri filed a complaint against the Towne plaintiffs. The complaint alleged that in 1987, Joseph Balestrieri and Joseph Zilber formed The Joseph Entertainment Group, Inc. (JEG). JEG owned the Alpine Valley Music Theatre, Inc. and the Riverside Theatre, Inc. Balestrieri and Zilber each owned fifty percent of JEG.
In addition to his ownership interest in JEG, the complaint alleged that Zilber had a controlling interest in Towne Realty. Towne Realty, which employed Donald Grande and Gerald Stein, acted as landlord at the Riverside Theatre. The complaint alleged that from 1990 to 1991, Zilber, in conjunction with Grande and Stein, stripped assets from JEG in the amount of
Based on the allegations in their complaint, the Balestrieris stated several causes of action against the named defendants. The following paragraphs are relevant to the disposition of this case:
63. Plaintiffs allege that defendants, COOKE, MANDEL, VOBORIL, HADDAD, HADDAD ENTERTAINMENT, and STEIN, directly and as an agent of ZILBER, GRANDE directly and as an agent of ZILBER, and ZILBER conspired to deprive plaintiffs of the opportunity to engage in their chosen professions at the Riverside Theatre. As a direct and proximate result of the actions of defendants, the business and personal reputations of plaintiffs have been so seriously maligned that plaintiffs reasonably believe they are precluded from engaging in their chosen professions within the United States.
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74. Plaintiffs further allege that said infliction of mental distress has resulted in the seeking of medical care to address and treat the effects of injuries perpetrated by defendants on plaintiffs.
The individual defendants and Towne learned of the Balestrieri complaint on October 10, 1991, and immediately retained the services of an attorney to defend them in the action. On October 21, Towne sent a letter to Zurich informing Zurich of the claim. Three days later, Zurich sent a reply letter acknowledging receipt of Towne‘s letter.
In November, Towne filed its responsive pleadings to the Balestrieri action. Towne also filed counterclaims that alleged several causes of action including defamation and a shareholder derivative claim. On
On January 6, the Balestrieris filеd a motion to voluntarily dismiss their claims against Towne without prejudice. The court granted the motion. Despite the dismissal of the Balestrieris’ suit, Towne continued to prosecute its counterclaims until June 4, when a stipulation and order for dismissal was filed with the trial court.
Towne subsequently filed a complaint for declaratory judgment against Zurich. The complaint sought a declaration that Zurich had a duty to defend Towne against the Balestrieri suit, that it breached its duty and that it was liable to Towne for attorney fees expended in defense of the action. Both Towne and Zurich filed motions requesting summary judgment, and a hearing was subsequently held. At the hearing, the trial court determined that the portion of the Balestrieri complаint that alleged damage to reputation sufficiently stated a claim for “personal injury” as that term was defined in the policy. The court further concluded that the allegation that the Balestrieris required medical care as a result of the mental distress inflicted by Towne sufficiently stated a claim for “bodily injury” under the policy. Accordingly, the trial court concluded that Zurich had a duty to defend Towne and granted Towne‘s motion for summary judgment.
Approximately six months later at a contested hearing to determine the amount of attorney fees and costs to which Towne was entitled, the trial court concluded that Towne was entitled to all legal fees
DUTY TO DEFEND
Zurich first contends that the trial court erred by granting Towne‘s motion for summary judgment because Zurich did not have a duty to defend Towne under the insurance policy. We review a summary judgment de novo, applying the same methodology as the trial court. See
Whether an insurer has a duty to defend is a question of law that we review without deference to the trial court. Kenefick v. Hitchcock, 187 Wis. 2d 218, 231-32, 522 N.W.2d 261, 266 (Ct. App. 1994). The existence of a duty to defend depends solely upon the nature of the claim being asserted against the insured and has noth
The issue whether Zurich breached its duty to defend Towne requires us to determine whether the Balestrieris’ allegation that their reputation was “maligned” by Towne‘s conduct was sufficient to allege a “personal injury” under the terms of the insurance policy. Acсordingly, our analysis begins with a review of the policy‘s language. The policy provides:
COVERAGE B. PERSONAL AND ADVERTISING INJURY LIABILITY
1. Insuring Agreement.
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “personal injury” or “advertising injury” to which this coverage part applies. We will have the right and duty to defend any “suit” seeking those damages.
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SECTION V—DEFINITIONS
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10. “Personal injury” means injury, other than “bodily injury,” arising out of one or more of the following offenses:
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d. Oral or written publication of material that slanders or libels a person or organization or disparages a person‘s or organization‘s goods, products or services.
This policy provides coverage to Towne in the event it slanders or libels a person through oral or written publication. A publication is libelous or slanderous if it “‘tends so to harm the reputation of another so as to lower him in the estimation of the community or to deter third persons from associating or dealing with him.‘” Voit v. Madison Newspapers, 116 Wis. 2d 217, 222, 341 N.W.2d 693, 697 (1984) (citation and emphasis omitted).
Here, paragraph 63 of the Balestrieris’ complaint alleges that the Balestrieris’ reputations were seriously “maligned” by Towne‘s actions and that this injury precluded them from engaging in their chosen professions within the United States. WEBSTER‘S THIRD INT‘L DICTIONARY 1367 (Unabr. 1976) defines “malign” as: “[T]o utter injuriously misleading or . . . false reports about.” Thus, while the Balestrieris’ complaint did not expressly state a claim for libel or slander, the implication of this allegation is that Towne published false or misleading statements about them that caused damage to their reputation. Further, because the complaint states that the Balestrieris could no longer engage in their chosen profession, it reasonably suggests that damage was done to their reputation.
Zurich, however, relies on Nichols v. American Employers Ins. Co., 140 Wis. 2d 743, 412 N.W.2d 547 (Ct. App. 1987), as support for its contention that the Balestrieri complaint did not state a claim within the policy‘s definition of “personal injury.” We are not persuaded. In Nichols, the plaintiff filed a complaint against Nichols Motors, alleging that it had discriminated against her based on gender. Id. at 745, 412 N.W.2d at 549. Nichols subsequently tendered the defense to its insurer. Id. Under the insurance policy, Nichols was covered against defamation claims. Id. Nichols argued that because the plaintiff made claims that were arguably defamatory, it was covered under the policy. Id. at 746-47, 412 N.W.2d at 549. This court, however, rejected Nichols’ argument and concluded that Nichols was not covered under the policy. In arriving at this conclusion, we expressly stated: “Nowhere does she relate any statements alleging defamation. In
Nichols is distinguishable from this case because the Balestrieris’ complaint did make an allegation that could reasonably be construed as a claim for libel, slander or disparagement of services. As we previously concluded, the gravamen of paragraph 63 of the Balestrieri complaint is that their personal and business reputations were maligned as a result of Towne‘s actions. Damage to one‘s reputation is the essence of a cause of action for libel or slander. Thus, unlike Nichols, the Balestrieris’ allegation that they were maligned and that their reputations were damaged was sufficient to fall within the definition of “personal injury” as defined by the Zurich policy. Because we conclude that the Balestrieris’ complaint stated a claim for “personal injury” under the policy, we need not address the issue whether the complaint stated a claim for “bodily injury” as well.
Zurich, however, next cоntends that it did not have a duty to defend Towne prior to January 2, 1992, because Towne‘s letter of October 21, 1991, was not sufficient to tender the defense. Zurich argues that the October 21 letter merely asked for a determination of coverage and that because the letter did not specifically request a defense, Zurich did not have an obligation to assume a defense on Towne‘s behalf. Whether the October 21 letter was legally sufficient to tender the defense is a question of law that we review without deference to the trial court. See Nottelson v. Department of Industry, Labor and Human Relations, 94 Wis. 2d 106, 115-16, 287 N.W.2d 763, 768 (1980).
The adequacy of a tender of defense appears to be an issue of first impression in Wisconsin. Our review of this issue in other jurisdictions reveals a split of
We are persuaded by those jurisdictions that hold that notice of the claim is sufficient to tender a defense. There are two reasons we conclude this to be the better rule. First, the insured is frequently less sophisticated and knowledgeable with regard to the intricacies of an insurance company‘s duty to defend than is the insurer which has а staff of professionals available to assist it in discharging its obligation to defend. Because the insurance company is in a better position to understand its obligation to defend, notice of the claim should be sufficient to invoke the insurer‘s duty to determine coverage and its obligation to defend. Further, this rule is consistent with the assumption that when an insured is owed a defense under the terms of its policy, the insured desires the benefit of the policy for which the insured has paid a premium. Finally, this rule protects the insured by placing the burden of ensuring that there is clear communication between the parties upon the insurer, who is in a better position to undertake this task. Thus, for the foregoing reasons, we conclude that if the insurer has notice of the claim
In this case, there is no question that the October 21 letter put Zurich on notice of the claim. The letter specifically requested that Zurich undertake an examination of the complaint, which was included with the letter, ‘to determine whether the Balestrieris’ claims were covered by the policy. Moreover, the letter requested Zurich to continue with the attorney Towne had obtained in the defense of this action, which suggested that if coverage existed Towne assumed Zurich would undertake thе defense. Thus, while we need not determine this issue, the letter‘s reference to continuing counsel could be construed as a request that Zurich assume defense of the action. Because the October 21 letter was sufficient to put Zurich on notice of the claim against Towne, we conclude that Towne properly tendered defense of the action to Zurich.1
DAMAGES
Having concluded that Zurich had a duty to defend Towne and that it breached this duty, we must next determine whether the trial court‘s award of attorney fees was proper. This is a question of law that we review without deference to the trial court. Newhouse, 176 Wis. 2d at 837, 501 N.W.2d at 6. To determine the
Zurich raises a variety of objections to the trial court‘s award of attorney fees. Specifically, Zurich contends that the trial court erred by awarding Towne attorney fees for: (1) legal expenses incurred prior to the time the Balestrieri complaint was tendered to Zurich; (2) legal expenses incurred in prosecuting counterclaims against the Balestrieris after the Balestrieris voluntarily dismissed thеir complaint without prejudice; and (3) legal expenses incurred in attempting to establish the amount of legal fees expended in the Balestrieri action and the subsequent declaratory judgment action against Zurich. We shall address each of these contentions in turn.
The Balestrieris commenced their suit against Towne on October 10, 1991. Towne, however, did not provide Zurich with notice of the claim until October 21. Towne argued that an attorney‘s services were immediately necessary because the Balestrieri action was a highly visible claim that generated wide publicity, thereby requiring it to take immediate legal action
Zurich, however, argues that the trial court erred by awarding Towne attorney fees incurred prior to October 21. Relying on Pitrowski v. Taylor, 55 Wis. 2d 615, 201 N.W.2d 52 (1972), Zurich argues that an insurer is not liable for costs and fees incurred by the insured until such time as the defense is tendered. Therefore, because Towne did not tender the defense until October 21, Zurich contends that it is not liable for any fees incurred prior to that date. We do not agree with Zurich‘s reading of Pitrowski.
In Pitrowski, our supreme court concluded that the insurer was not liable to thе insured for attorney fees because the insured failed to tender the defense. We agree with Pitrowski that an insured‘s failure to tender the defense to the insurer relieves the insurer of its duty to defend. In this case, however, we have already concluded that Towne properly tendered defense of the claim to Zurich. Accordingly, the only question is whether Towne was entitled to recover the legal expenses it incurred prior to tendering the defense. Because these expenses were necessary to Towne‘s defense, we conclude that the trial court properly awarded Towne attorney fees incurred prior to the time it tendered the defense.
In Newhouse, our supreme court exprеssly stated that an insured is entitled to costs and attorney fees incurred in defending the suit. Id. at 837-38, 501 N.W.2d at 6. Thus, because Zurich does not challenge
Further, we note that Zurich does not contend that the legal expenses Towne incurred during the initial ten-day period were unnecessary, nor has it challenged the trial court‘s factual finding on this point. Rather, Zurich‘s position is that expenses incurred prior to the tender of the defense may not be recovered by the insured, regardless of their necessity. We see no basis for such a rule. In fact, such a rule would conflict with Newhouse, which requires the insurer to pay damages in the amount necessary to make the insured whole. Id. at 838, 501 N.W.2d at 7.
For the sake of clarity, we note that our conclusion does not authorize every defendant to immediately hire an attorney for the purpose of defending a claim and charge the expenses to their insurance company. An immediate legal response is not generally necessary to the proper defense of a claim. In this case, however, the Balestrieris’ complaint endangered Towne‘s ability to continue its business and the trial court found that an immediate response was necessary to protect its interests. Accordingly, these expenses were recoverable.
Zurich next challenges the trial court‘s award of legal expenses that Towne incurred in prosecuting its counterclaim after the Balestrieris voluntarily dismissed their complaint. Relying on Edgerton v. General Cas. Co., 184 Wis. 2d 750, 517 N.W.2d 463 (1994), Zurich contends that an insurer‘s obligation to defend ceases once the plaintiff‘s complaint is dismissed. Zurich‘s reliance on Edgerton is misplaced. In Edgerton, our supreme court held that an insured‘s receipt of letters from the DNR requesting remediation of a contaminated site did not trigger the insurer‘s duty to defend because the letters did not constitute a “suit” under the policy. Id. at 781-82, 517 N.W.2d at 477. The court further noted that “the primary attribute of a ‘suit’ is that parties to an action are involved in actual court proceedings, initiated by the filing of a complaint.” Id. at 775, 517 N.W.2d at 474. Because no complaint had been filed, the Edgerton court held that the insurer did not have a duty to defend. In this case, however, there is no dispute that the Balestrieris initiated a suit through the filing of a complaint. Accordingly, Edgerton is inapposite to this case.
The issue we must address is whether an insurer, which has breached its duty to defend, is relieved from liability for legal expenses that the insured incurs in prosecuting counterclaims that were initiated prior to the dismissal of the original complaint. In addressing this issue, we note that neither party has cited, nor have we located, a Wisconsin case that addresses this issue. Nonetheless, we are unable to discern any basis for treating these expenses differently than other legal expenses incurred in defending a suit. Therefore, if it was necessary for Towne to continue to prosecute its counterclaims to defend against the Balestrieris’ claims, these expenses are recoverable despite the fact that they were incurred after the complaint was dismissed.
The trial court found that Towne‘s decision to continue the prosecution of its counterclaims was part of a
I think that given what I have learned from my own review of this file . . . that it was not only appropriate but probably mandatory in this case that the parties had to—in order to defend against the original causes of action had to bring their own counterclaims as well as affirmative defenses.
And I think that the fact that a PR firm appeared at the trial itself or at one of the hearings suggests that this was no ordinary case and that the parties were required to use extraordinary skill in trying to get this case resolved and get a good settlement for [Towne] in this case.
I also am of the belief given—and generally speaking if someone came in here and said we want to keep defending this case after the matter has been dismissed, I would be inclined to endorse [Zurich‘s] view, however, given this case and given the fact that there were PR firms, given the fact that the parties—at least the substituted counsel for the [Balestrieris] were unhappy with the judge that was assigned to this case and had made attempts at trying to get around this particular judge, I can see where a motion to dismiss without prejudice would be of very little comfort to the plaintiffs in our case for they know that this case would just come back and arise from the Phoenix in some other form and in some other court.
The trial court‘s findings are supported by the evidence. Expenses incurred by a defendant after the complaint is dismissed generally will not be recoverable. However, in those cases where it is necessary for the defendant to incur legal expenses to properly defend the suit, those expenses are recoverable even if
Finally, Zurich contends that the trial court erred by awarding Towne the attorney fees it incurred in attempting to establish the amount of legal fees expended in the Balestrieri action and the subsequent declaratory judgment action against Zurich. This issue
The insurer that denies coverage and forces the insured to retain counsel and expend additional money to establish coverage for a claim that falls within the ambit of the insurance policy deprives the insured the benefit that was bargained for and paid for with the periodic premium payments. Therefore, the principles of equity call for the insurer to be liable to the insured for expenses, including reasonable attorney fees, incurred by the insured in successfully establishing coverage.
Id. at 322, 485 N.W.2d at 408. Thus, the trial court correctly concluded that Towne was entitled to these fees. Indeed, Towne would be entitled to the fees that it incurred in making this appeal if these expenses were necessary in establishing coverage.
We recognize that an insurer that breaches its duty to defend is exposed to substantial financial penalties. Nonetheless, the cost of defense and the cost necessarily associated with proving the insurer‘s breach of contract must be borne by someone. Principles of contract law demand that this burden be placed upon the party who breached the contract rather than the innocent insured who was owed a defense. In this case, Zurich may have been able to avoid liability had it requested a bifurcated trial on the issues оf coverage and liability and moved to stay the liability proceedings until the issue of coverage was resolved. See Newhouse, 176 Wis. 2d at 837-38, 501 N.W.2d at 6. However, because it failed to undertake this procedure, we conclude that the trial court properly concluded that Zurich was liable for all legal expenses Towne incurred from the time the complaint was filed until
By the Court.—Judgment affirmed.
CANE, P.J. (dissenting). I dissent only from that portion of the majority‘s conclusion that the respondents (Towne) are entitled to recover their attorney fees incurred prior to notifying their insurer of the complaint and in pursuing their counterclaim. Therefore, I would remand the matter back to the trial court for redetermination of attorney fees.
Here, the Balestrieris filed their suit on October 10, 1991, alleging various improper business transactions committed by Towne concerning the Balestrieris’ involvement in and subsequent ouster from promoting events at the Alpine Valley Music Theatre and the Riverside Theatre. In their complaint, the Balestrieris sought damages for their injuries allegedly suffered as a result of Towne‘s actions. This was not an action seeking immediate relief in court, such as an injunction or other proceeding requiring immediate response. Rather than notifying their insurer, Zurich Insurance, Towne immediately elected to retain their own counsel to represent them. Towne did not request Zurich to furnish them with legal counsel or a defense, nor did they seek authorization from Zurich for expenditures for attorney fees. Eventually, in a letter dated October 21, 1991, Towne notified Zurich of Balestrieris’ action.1 After Zurich declined to defend, Towne filed their answer and also asserted a counterclaim asserting sev
The Zurich insurance policy requires Towne to give prompt notice of any suit. Also, the policy provides that “No insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.” Simply put, under the terms of the insurance contract, Zurich‘s duty to defend Towne did not arise until it was put on notice of the suit. Until it received that notice, Zurich had no duty to pay any expenses voluntarily incurred by Towne. It is not the court‘s function to rewrite the insurance contract between the parties. Although there was an ongoing dispute with the Balestrieris, there is nothing in the record to suggest that Towne did not have time to notify Zurich of the Balestrieris’ complaint and request a defense. They simply elected to immediately proceed with their own counsel.
It is basic insurance law that an insurer‘s obligation to defend does not arise until the insured notifies the insurer of the complaint. See 7C APPLEMAN INSURANCE LAW AND PRACTICE, § 4682 (West Supp. 1994). Therefore, because Towne had sufficient time to notify Zurich of the complaint, but instead elected to retain their own legal counsel, I would hold that Towne is precluded from recovering any defense costs incurred prior to the tender of the defense to Zurich.
I also reject the majority‘s conclusion that Towne should be entitled to recover their legal costs incurred in prosecuting the counterclaim against the Balestrieris; especially those legal expenses and costs incurred even after the Balestrieri lawsuit was voluntarily dismissed on January 21, 1992. Towne contends that the counterclaim was a good “defense” strategy
I agree with Zurich that its only obligation under the insurance policy with respect to its defense obligation is to defend suits filed against its insured. The policy does not obligate Zurich to pay legal costs for its insured to prosecute counterclaims. Nor is there an obligation to file suits on the insured‘s behalf as a buffer to “suits” which might be filed against its insured.
Recently, our Supreme Court in Edgerton, 184 Wis. 2d at 781, 517 N.W.2d at 477, held that there was no ambiguity in the term “suit” as used in insurance policies. The Edgerton court held that “suit” denotes court proсeedings, not a functional equivalent. Id. It defined suit as “any proceeding by one person or persons against another or others in a court of law in which the plaintiff pursues, in such court, the remedy which the law affords him for the redress of an injury or the enforcement of a right, whether at law or equity.” Id. at 774, 517 N.W.2d at 474 (quoting State v. P.G. Miron Constr. Co., 181 Wis. 2d 1045, 1053, 512 N.W.2d 499, 503 (1994) (emphasis in original)). As succinctly stated: “When there is no suit, there is no duty to defend.” Id. at 781, 517 N.W.2d at 477.
Therefore, I would conclude that Zurich had no duty to pursue a counterclaim for its insured even though arguably, it might be a good defense strategy. It
I am also more emphatic that pursuing a counterclaim after the lawsuit against the insured has been dismissed is not included within Zurich‘s obligation to defend suits against it insured. Obviously, when there is no longer a suit, there is no longer a suit to defend. Here, the fear that the Balestrieris might file another lawsuit is irrelevant. As held in Edgerton, the threat of litigation or the fear that one might file suit does not trigger an insurer‘s duty to defend, especially in this case by pursuing a counterclaim.
Accordingly, I would reverse that portion of the judgment awarding attorney fees and costs incurred prior to Towne notifying Zurich of the Balestrieri lawsuit and those attorney fees and costs incurred in pursuing Towne‘s counterclaim. I would therefore remand the matter back to the trial court for redetermination of attorney fees.