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COURT OF APPEALS DECISION DATED AND FILED November 19, 2002 Cornelia G. Clark Clerk of Court of Appeals |
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This opinion is subject to further editing. If published, the official version will appear in the bound volume of the Official Reports. A party may file with the Supreme Court a petition to review an adverse decision by the Court of Appeals. See Wis. Stat. § 808.10 and Rule 809.62. |
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APPEAL from an order of the circuit court for Milwaukee
County: maxine a. white, Judge.
Affirmed.
Before Fine, Schudson and Curley,
JJ.
¶1 PER
CURIAM. Paul
J. Piotruszewicz appeals from the order for summary judgment dismissing his
third-party claim against Badger Mutual Insurance Company. He argues that the circuit court erred in
concluding that the pay-and-walk provision of his Badger Mutual policy was
enforceable and thus permitted Badger Mutual to pay its policy limits and not
defend him against Rubrich’s tort action for damages in excess of the policy’s
limits. Specifically, Piotruszewicz
argues that: (1) Badger Mutual was required to “seek judicial determination of
the validity of its ‘pay and walk’ provision” prior to exercising the option;
(2) Badger Mutual’s pay-and-walk provision is ambiguous, and, therefore,
unenforceable; (3) Badger Mutual’s conduct demonstrated bad faith; and (4) the
pay-and-walk provision is void as against public policy. We affirm.
I. BACKGROUND
¶2 On
July 28, 1999, Pamela Rubrich was seriously injured when her car collided with
a car owned and operated by Piotruszewicz.
Piotruszewicz had $100,000 of liability coverage through Badger
Mutual.
¶3 In
April 2000, Badger Mutual informed Piotruszewicz that it was considering
entering into a settlement agreement with Rubrich, and advised Piotruszewicz
that if Rubrich did not release him, Badger Mutual would exercise its right to
pay the policy limits and withdraw from further involvement. The letter also indicated that, in order to
give Piotruszewicz the opportunity to seek counsel, Badger Mutual would not
make an offer any earlier than May 1, 2000, and it concluded by indicating that
if no objection to such tender was received by May 1, Badger Mutual would consider
exercising its pay-and-walk provision.
¶4 Piotruszewicz
retained counsel and, after negotiations failed, Badger Mutual entered into a
settlement agreement in which it paid Rubrich the policy limits of $100,000; in
exchange, Rubrich fully released Badger Mutual and partially released
Piotruszewicz.
¶5 Two
months later, Rubrich brought an action against Piotruszewicz for excess
damages beyond the $100,000 Badger Mutual paid. Piotruszewicz, in turn, filed a third-party suit against Badger
Mutual, claiming that it was obligated to defend him even after paying the
policy limits. Badger moved for summary
judgment; the court granted the motion based on the policy’s pay-and-walk provision,
which provided that Badger had no duty to defend upon exhaustion of its policy
limits.
II. ANALYSIS
¶6 We
review an order granting summary judgment de novo using the same
methodology as the circuit court. Green
Spring Farms v. Kersten, 136 Wis. 2d 304, 315-17, 401 N.W.2d 816
(1987). Summary judgment is appropriate
if “the pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no genuine issue
as to any material fact and that the moving party is entitled to a judgment as
a matter of law.” Wis. Stat. § 802.08(2) (1999-2000).[1]
¶7 Interpretation
of an insurance policy provision in the context of undisputed facts presents an
issue of law for which we owe no deference to the conclusions of the circuit
court. Danbeck v. American Family
Mut. Ins. Co., 2001 WI 91, ¶10, 245 Wis. 2d 186, 629 N.W.2d 150. We apply an objective test to the insurance
contract and interpret it as it would be understood by a reasonable person in
the insured’s position. Id. The words of an insurance policy are given
their common and ordinary meaning. Henderson
v. State Farm Mut. Auto. Ins. Co., 59 Wis. 2d 451, 457-59, 208 N.W.2d
423 (1973). “[T]o avoid rewriting the
contract by construction and imposing contract obligations that the parties did
not undertake,” we enforce plain and unambiguous policy language as
written. Danbeck, 2001 WI
91 at ¶10.
¶8 Piotruszewicz
argues that this pay-and-walk provision is unenforceable because it does not
comply with the requirements specified in Gross v. Lloyds of London
Insurance Co., 121 Wis. 2d 78, 358 N.W.2d 266 (1984). He contends that the policy language does
not conform with the mandate set forth in Gross and, further,
that absent court approval, Badger Mutual had no right to exercise the
provision. His arguments are without
merit.
¶9 In Gross, the supreme court held:
In order for an insurer to be relieved of its duty to defend upon tender of the policy limits, the “tendered for settlements” language must be highlighted in the policy and binder by means of conspicuous print, such as bold, italicized, or colored type, which gives clear notice to the insured that the insurer may be relieved of its duty to defend by tendering the policy limits for settlement.
Id. at 89. “The court fashioned the conspicuous
language requirement in order to place insureds on notice that ‘they are buying
a policy of indemnity and a defense only up to the point where the insurer
tenders the policy limits for settlement and that the insurer’s duty to defend
ceases once such a tender has been made.’”
Hoffman v. Economy Preferred Ins. Co., 2000 WI App 22, ¶5,
232 Wis. 2d 53, 606 N.W.2d 590 (citation omitted).
¶10 Here, the Badger Mutual Personal Auto Policy’s Insuring Agreement provided:
PART A-LIABILITY COVERAGE
INSURING AGREEMENT
A. We will pay damages for “bodily injury” or “property damage” for which any “insured” becomes legally responsible because of an auto accident. Damages include prejudgment interest awarded against the “insured”. We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. OUR DUTY TO SETTLE OR DEFEND ENDS WHEN OUR LIMIT OF LIABILITY FOR THIS COVERAGE HAS BEEN EXHAUSTED. WE HAVE NO DUTY TO DEFEND ANY SUIT OR SETTLE ANY CLAIM FOR “BODILY INJURY” OR “PROPERTY DAMAGE” NOT COVERED UNDER THIS POLICY.
(Capitalization
in original.) The paragraph’s headings
and first four sentences were in black type; the capitalized last two sentences
were in blue. Clearly, Badger Mutual’s
pay-and-walk provision complied with the mandates of Gross; the
provision was in capital letters and a different colored type, and the text
explicitly stated that the insurer’s duty to defend ended when its limit of
liability for the coverage had been exhausted.
No court order was required for Badger Mutual to exercise its
pay-and-walk provision.
¶11 Piotruszewicz
next argues that the pay-and-walk provision is ambiguous and, therefore,
unenforceable. Citing Brown v.
Lumbermens Mutual Casualty Co., 390 S.E.2d 150, 153-54
(N.C. 1990), Piotruszewicz maintains that Badger’s pay-and-walk language is
“ambiguous because it did not specify in what manner the limits would have to
be ‘exhausted’ before its duty to defend was discharged.” We disagree.
¶12 In Brown, the North Carolina Supreme Court found what it termed to be a latent ambiguity in the duty-to-defend provision of an automobile liability insurance policy and construed the ambiguity in favor of the insured. Id. at 153-54. The duty-to-defend provision at issue in Brown provided:
We will pay damages for bodily injury or property damage for which any covered person becomes legally responsible because of an auto accident. We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted.
Id. at 153. The court concluded that this language was
ambiguous because it did not specify in what manner the limits would have to be
exhausted before its duty to defend was discharged. Id. at 153-54.
Specifically, the court reasoned:
“The various terms of the policy are to be harmoniously construed, and if possible, every word ... is to be given effect.” The second sentence in the provision requires the insurer to “settle or defend” covered claims against its insured. The third sentence requires the insurer to bear defense costs in addition to paying liability limits, indicating that the duties to pay claims and to defend are separate and independent.
When the final sentence regarding exhaustion of coverage limits and termination of the duty to settle or defend is read together with the prior sentences, the entire provision’s ambiguity becomes apparent. As the plaintiffs argue and the Court of Appeals correctly recognized, the insurer could “exhaust” its coverage limits in any number of ways. It could pay them into and interplead conflicting claimants in a declaratory judgment action…. It could, as was done here, pay them to the injured party, in return for a release only of the insurer and not the insured….
The ambiguity in the questioned provision thus lies not in the meaning of the word “exhausted.” It lies in the manner by which the coverage must be exhausted before the duty to defend terminates….
Id. at 154 (citations
omitted). The Brown court
determined that under the policy’s ambiguous terms relating to the duty to
defend, the insurer’s unilateral tender to and the injured party’s acceptance
of the policy’s limit without a release of the insured did not relieve the
insurer of its duty to defend. Id.
at 155-56.
¶13 Brown’s
interpretation of this pay-and-walk language, however, is not universally
accepted. In Pareti v. Sentry
Indemnity Co., 536 So. 2d 417 (La. 1988), the defendants’ insurer
negotiated a compromise and release whereby the insurer and its insureds were
released from all liability for the policy’s limit. Id. at 419-20.
The plaintiffs’ uninsured carrier filed a cross claim seeking indemnity
against the defendants. Id. Subsequent to the compromise, the
defendants were still represented by the insurer’s attorney whose motion for a
summary judgment (on the uninsured motorist carrier’s cross claim) was
denied. Id. The insurance company then notified
its insureds, i.e., the defendants, that it would no longer provide a defense
against the cross claim. Id.
at 420. The defendants cross claimed
against their insurer alleging a breach of its duty to defend and seeking
attorney’s fees and costs. Id.
¶14 Reviewing a virtually identical pay-and-walk provision, the Louisiana Supreme Court concluded:
When the paragraph of the policy containing this language ... is read as a whole, there is no ambiguity. The promise to defend “any” covered claim is clearly qualified, almost immediately thereafter in the same paragraph, by the statement: “Our duty to defend or settle ends when our limit of liability … has been exhausted.” Read as a whole, the only reasonable interpretation of this section is that the insurer will defend any claim, but the defense obligation will terminate if and when the insurer’s policy limits are exhausted. These provisions are not subject to more than one reasonable interpretation. The policy in this regard is not ambiguous.
….
This standard policy provision [“In addition to our limit of liability, we will pay all defense costs we incur”] simply means that defense costs will be paid separately by the insurer and will not be applied against its policy limits…. This language cannot be taken to mean that the company will continue to pay defense costs once its policy limits have been exhausted, and in fact the very next sentence of the policy expressly states that this will not be the case. Once again, these sentences must be construed together, and when they are so construed there is no ambiguity.
Pareti,
536 So. 2d at 420-21 (citations and footnotes omitted). Similarly, we conclude that the Badger
Mutual policy language is clear; neither the word, “exhausted,” nor the manner
of “exhausting” the policy limits is ambiguous and, therefore, the policy is
enforceable.
¶15 In
Wisconsin, a liability insurer generally has a contractual duty to defend its
insured in an action for damages, and may be required to furnish a defense to
its insured prior to the determination of coverage. Mowry v. Badger State Mut. Cas. Co., 129 Wis. 2d
496, 527-28, 385 N.W.2d 171 (1986); see also Elliott v. Donahue,
169 Wis. 2d 310, 485 N.W.2d 403 (1992).
An obligation to defend arises when the complaint alleges facts which,
if proven, support liability covered under the terms and conditions of the
policy. Professional Office
Bldgs., Inc. v. Royal Indem. Co., 145 Wis. 2d 573, 580, 427 N.W.2d 427
(Ct. App. 1988). However, when an
insurer exhausts its liability by judgment or settlement, it fully discharges
its obligation to the insured. Teigen
v. Jelco of Wis., Inc., 124 Wis. 2d 1, 8, 367 N.W.2d 806 (1985). As long as the insurer carries out the terms
of its insurance contract and fully protects itself and the insured from
further exposure of liability, it may discharge the duty to defend upon
exhaustion of the policy limits by judgment or settlement. Id. at 8-9.
¶16 Although no Wisconsin court has analyzed the exact pay-and-walk language found in the Badger Mutual policy, several of our recent decisions support our conclusion. See Novak v. American Family Mut. Ins. Co., 183 Wis. 2d 133, 136, 515 N.W.2d 504 (Ct. App. 1994). In Novak, this court considered a pay-and-walk provision—“We will not defend any suit after our limit of liability has been offered or paid”—and concluded that it was enforceable. Id. at 136. Badger Mutual argues that if the pay-and-walk provision of Piotruszewicz’s policy were ambiguous, the pay-and-walk provision in Novak “should have been invalidated as being even broader than the Badger Mutual clause at issue in the instant case.” Badger Mutual explains:
This is because the American Family [Insurance pay-and-walk provision at issue in Novak] allows American Family to terminate its defense once its limits have been either paid or offered, whereas the Badger Mutual clause authorizes Badger Mutual to terminate its defense only when it has actually exhausted its limits. The breadth of the American Family clause notwithstanding, the Court of Appeals had no problem with its wording.
¶17 Badger
Mutual is correct. The facts here are
analogous to those in Novak.
In Novak, American Family sought to withdraw from
defending its insured, having already paid the entire policy limit, and a
partial settlement in the tort suit had released the insured to the extent of
the policy limit only. Id. at
135, 139. Novak argued that American
Family’s duty to him would be fulfilled only upon payment of policy limits
incidental to an agreement or judgment that met his approval or finally settled
the pending claim against him within the policy limits. Id. at 137. Novak contended that the insurer
breached its duty to defend him when it paid policy limits and refused to
defend him on the excess liability claim.
Id. We rejected
Novak’s argument and concluded that the duty to defend was a creature of
contract, subject only to contractual limitations and fair notice. Id.
Citing Gross, we explained that the contract
provision was enforceable as long as the insureds were aware of the policy
provision. Id. at
137-38. We noted that if they were
aware of the provision, they could “‘choose to afford themselves greater
protection in the defense of claims by increasing the amount of their policy
limits or seek a policy which provides for unlimited defense.’” Id.
at 139 (quoting Gross, 121 Wis. 2d at 89). The same could be said here.
¶18 Piotruszewicz
next argues that the court erred in dismissing his bad faith claim. Essentially, he contends that: (1) the facts
demonstrate Badger’s bad faith; and (2) public policy prohibits an insurance
company from terminating its defense after the policy limits have been
paid. We disagree.
¶19 Tracing
the circumstances and chronology of Badger Mutual’s communication with him and,
ultimately, his attorney, Piotruszewicz argues that Badger’s conduct, and
particularly its failure to seek court approval prior to exercising its
pay-and-walk provision, demonstrates bad faith. We disagree.
¶20 As
noted, Badger Mutual was unable to reach a settlement with Rubrich that
included “a full and final release” of Piotruszewicz. But Badger had no obligation to do so. Indeed, Piotruszewicz offers no reply, aside from his policy
arguments, to Badger’s assertion that it had absolutely no obligation to
communicate with Piotruszewicz at all; it simply could have paid its policy
limits, thus triggering the pay-and-walk provision. See Hoffman, 2000 WI App 22 at ¶9; see also Blank
v. USAA Prop. & Cas. Ins. Co., 200 Wis. 2d 270, 276-78, 546 N.W.2d
512 (Ct. App. 1996) (holding “that acceptance of an offer of settlement
directed only at the insurer for its policy limits, after insurer’s reasonable
efforts to settle the claim against its insured have been refused, creates no
reasonable grounds to fear a bad faith claim,” and explaining that “a valid bad
faith claim in Wisconsin requires proof of a significant disregard of the
insured’s interest”). Thus,
Piotruszewicz’s bad-faith theory is premised on a legal proposition that simply
does not exist.
¶21 Piotruszewicz
argues, however, that public policy prohibits an insurance company from
terminating its defense after the policy limits have been exhausted. We disagree. Wisconsin courts have implicitly concluded that an insurer’s
termination of its defense under such circumstances does not violate public
policy. See Gross v. Lloyds of
London Ins. Co., 118 Wis. 2d 367, 375, 347 N.W.2d 899 (Ct. App.), rev’d
on other grounds, 121 Wis. 2d 78, 358 N.W.2d 266 (1984); see also Novak,
183 Wis. 2d at 141.
¶22 Again,
in Novak, the plaintiff argued that even if the pay-and-walk
provision was enforceable, the insurer’s unilateral decision to pay the limit
and abandon the defense of the action was a breach of contract and tortious bad
faith because it had a duty to submit its settlement to the court for
approval. Novak, 183 Wis.
2d at 141-42. This court disagreed and
held that American Family “had not failed to fulfill its obligations under the
contract.” Id. at
142. Additionally, this court
reiterated: “‘[T]here is nothing contrary to public policy in an insurer’s
explicit policy language which limits the duty to defend to the policy limits.’ In the absence of a statement from the
supreme court stating otherwise, our holding is controlling. Thus, we conclude that the limitation on the
duty to defend is enforceable and is not contrary to public policy.” Id. at 141 (quoting Gross,
118 Wis. 2d at 375); see also Cook v. Cook, 208 Wis. 2d 166, 190,
560 N.W.2d 246 (1997) (“court of appeals may not overrule, modify or withdraw
language form a previously published decision of the court of appeals”).
¶23 An
automobile liability insurance policy may specifically provide for the termination
of a duty to defend upon payment of policy limits. Public policy requires the insurer to act in good faith in the
interest of the insureds. Here, Badger
Mutual complied with the unambiguous language of the policy; its conduct showed
no bad faith. Badger Mutual attempted
to obtain a settlement on behalf of Piotruszewicz but, when Rubrich refused, it
made a reasonable settlement on behalf of Piotruszewicz for the policy limits. See Blank, 200 Wis. 2d at
276-79 (no bad faith if insurer employed diligence but failed to obtain full
release of insured). The unambiguous
policy language allowed Badger Mutual to terminate its duty to defend upon
exhaustion of the policy limits. Thus,
Badger Mutual was entitled to summary judgment.
By the Court.—Order affirmed.
This opinion will not be published. See Wis.
Stat. Rule 809.23(1)(b)5.