COURT OF APPEALS
DECISION
DATED AND FILED
July 21, 2010
A.
John Voelker
Acting Clerk of Court of Appeals
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NOTICE
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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 No.
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STATE OF WISCONSIN
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IN COURT OF
APPEALS
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DISTRICT II
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Lakeside Foods, Inc.,
Plaintiff-Appellant,
v.
Liberty Mutual Fire Insurance Co.,
Defendant-Respondent.
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APPEAL
from a judgment of the circuit court for Manitowoc County: JEROME
L. FOX, Judge. Affirmed in
part, reversed in part and cause remanded.
Before Brown, C.J., Neubauer, P.J., and Snyder, J.
¶1 NEUBAUER, P.J.
Lakeside Foods, Inc., (“Lakeside”) appeals from a summary judgment in
favor of Liberty Mutual Fire Insurance Company (“Liberty”) on a duty to defend and bad faith
claim. Lakeside alleges that Liberty failed to provide it with an immediate and
complete defense against a liability claim filed in California.
Lakeside premises its contention primarily on Liberty’s
alleged failure to respond to its tender of defense for a three-month period after
which Liberty reserved its rights and refused to
pay reasonable attorney fees to Lakeside’s
choice of counsel. The trial court
determined that Liberty and Lakeside reached an
oral agreement regarding the reimbursement of attorney fees incurred in
Lakeside’s defense and, therefore, Liberty
did not breach its duty to provide a full and complete defense. We reverse the trial court’s judgment and remand
for further proceedings because the facts surrounding the alleged oral
agreement resolving all defense issues are disputed, as are the facts relating
to Liberty’s
alleged bad faith. Additionally, the
trial court erred in its determination that the California Cumis statute applies. However, we affirm the trial court’s ruling
to the extent that the court found that there was no breach of the duty to
defend based solely on Liberty’s
failure to respond to the tender of defense for three months.
BACKGROUND
¶2 Lakeside is a food packaging company based in Manitowoc, Wisconsin,
with facilities in Wisconsin, Minnesota, and Ohio. Lakeside purchased a commercial general
liability insurance policy from Liberty
for a coverage period of May 1, 2005, to May 1, 2006. Liberty is an
insurance company whose Appleton, Wisconsin office issued the general liability insurance
policy to Lakeside. The insurance policy covered, among other
things, third-party claims of personal injury resulting from Lakeside’s
products or work.
¶3 Beginning in 2004, Lakeside entered into an agreement with a California firm, OnTech,
to seal and process self-heating containers.
OnTech is the owner of self-heating technology and another firm, Sonoco,
is the manufacturer of the self-heating containers that utilizes OnTech’s
technology. From 2003 to 2005, Lakeside filled OnTech’s orders. Beginning in 2005, in addition to filling
OnTech’s orders, Lakeside entered into a
packaging agreement with one of OnTech’s customers, WP Beverage Partners
(“WP”), to directly fill WP’s orders.
¶4 On February 22, 2006, OnTech filed a lawsuit in Orange County
Superior Court against WP for nonpayment of invoices. On June 19, 2006, WP responded to OnTech’s
suit by filing a counterclaim and additional cross-claims against Lakeside and Sonoco, seeking damages in excess of $20
million. WP alleged, among other things,
that the self-heating containers caused personal injury and property damage to
consumers.
¶5 Lakeside was notified of the
action and served on June 26, 2006. The
suit alleged that Lakeside should be
responsible for damages resulting from defects in its self-heating
containers. Four days later, on June 30,
2006, Lakeside gave notice of the lawsuit to Liberty.
Lakeside’s counsel, David Krutz of Michael, Best & Friedrich
(Michael Best), advised Liberty
that it was “currently preparing the response pleading which is due on July 26,
2006” and “is providing notice of the Litigation and tendering it as a claim
pursuant to the terms of Policy.” Krutz
requested that Liberty
“advise us of your position as to coverage as soon as possible.” On July 24, 2006, Lakeside retained Turner,
Green, Afrasiabi & Arledge, LLP (“Turner Green”), as local counsel in California.
¶6 On July 25, 2006, Liberty
responded to Lakeside’s claim by informing Lakeside
that it had initiated a coverage investigation.
On September 14, 2006, approximately two and one-half months after the
initial tender, Liberty informed Lakeside it had accepted its duty to defend because the
cross-complaint alleged damages or injury to third parties caused by products. However, Liberty
reserved its rights to withdraw from the defense, and to seek reimbursement and
allocation of defense costs for uncovered claims.
¶7 On September 18, 2006, Liberty
assigned Lakeside’s case to panel counsel, the Los Angeles
law firm of Yoka and Smith, and requested that Lakeside’s
current representation, Michael Best, be substituted out of the case. Michael Best responded on October 12, 2006,
advising that Lakeside desired to maintain its
chosen counsel. On November 9, 2006, Liberty informed Lakeside that it would continue seeking
to replace Lakeside’s existing defense team, advising that Yoka and Smith was
“approved counsel” who will adhere to Liberty’s
“terms and conditions.” At the same
time, Liberty
again asserted that it reserved its rights to withdraw from the defense if the
pleadings were confined to claims for which there was no potential for
coverage. Liberty
advised if Lakeside continued with its choice of lead counsel, Michael Best, it
would be at Lakeside’s own cost.
¶8 Lakeside rejected the assignment in correspondence to Liberty dated November
28, 2006, in which Krutz explained:
[I]t is Lakeside’s position that because Liberty has reserved rights in this matter, Lakeside has the right to control the defense….
Over 40,000 documents have been exchanged in discovery;
numerous interviews of Lakeside’s employees
have taken place, numerous telephone conferences have taken place to discuss
strategy with counsel for OnTech and Sonoco; discovery responses have been
prepared. Lakeside
would be significantly harmed if new counsel took the lead.
¶9 Responding on December 4, 2006, Liberty
again asserted that it had the right to select counsel, and disagreed that Lakeside “has the right to control the defense.” In an affidavit submitted on summary judgment,
Lakeside’s chief financial officer and vice president of administration, Denise
Kitzerow, averred that Liberty’s attempt to
change counsel well into the litigation as well as its continued reservation to
withdraw its defense caused Lakeside “great
concern.”
¶10 During this time, Lakeside
continued to pay all of the costs and attorney fees in the underlying
litigation. Russell Schmidt, Lakeside’s
chief financial officer and vice president of finance, testified that in order
to obtain some participation from Liberty
as to the cost of defense, the parties discussed a fee arrangement.
¶11 On December 8, 2006, Liberty and
Lakeside attended mediation in the underlying
litigation. Following the mediation, the
parties discussed a fee arrangement whereby Liberty would pay $135 per hour towards
Turner Green’s counsel fees, however, a final agreement was not reached that
day.
¶12 Through subsequent phone conversations and voice messages
between Schmidt and Liberty senior technical claims specialist, Michael Baker, which
were documented by Baker in Liberty’s internal claim file notations, the parties
purportedly reached an arrangement for Liberty to pay a portion of Lakeside’s
fees to Turner Green. The record
reflects that on December 12, 2006, Liberty
contacted Lakeside and discussed allowing Lakeside to retain Turner Green if
they would agree to Liberty’s
panel counsel fee schedule. The next
day, Liberty contacted Turner Green which rejected what would have been a large
decrease in their normal fee schedule. The
file notations indicate that Turner Green proposed to Liberty
that Liberty pay $135 per hour and Lakeside pay the difference. Then, on December 13, 2006, Liberty left
Lakeside a message detailing Turner Green’s proposal. Lakeside responded to Liberty’s message on
December 20, 2006, agreeing to the fee arrangement and reiterating that it
would continue to retain Michael Best as lead counsel. Liberty then informed Turner Green of the
discussions. The parties disagree
whether this was an “understanding” or an “agreement,” and whether it was final
or temporary, but nonetheless, Liberty paid this hourly rate through the settlement
of the case.
¶13 In Liberty’s
internal notations from December 21, 2006, Baker summarizes the agreement as
follows:
We have finally, I believe, reached an agreement with
the defense: The [insured] will continue
to retain the Michael Best firm/David Krutz as lead counsel. They will do this at their cost. We have agreed to retain the Turner Green
firm (who the [insured] would like to keep on) as local counsel. They will agree to split their billing,
meaning we will pay fees and costs to $135 per hour and [insured] will then be
responsible for the difference.
However, Liberty’s
internal notations on December 20, 2006, also indicate that it was informed by Lakeside that it would “be getting something in writing
from Mr. Krutz.” Baker also noted that,
“once confirmed,” he would contact Turner Green to finalize details. The next day, on December 21, 2006, Baker sent
an email to another Liberty employee asking for approval of the retention of
Turner Green. It is undisputed that no
written agreement exists as to the payment of attorney fees.
¶14 On January 25, 2007, Krutz sent a letter to Liberty
acknowledging that Liberty had agreed to pay a portion of Turner Green’s fees
but asserted that Liberty was obligated to pay the full cost of defense. On February 7, 2007, Liberty responded to
Lakeside by sending a letter outlining the previous fee arrangement and stating
their disagreement with Lakeside’s position.
Despite its assertion that the defense issue had been resolved, Liberty
reiterated its reservation of rights to seek allocation or reimbursement of
defense costs for uncovered claims.
¶15 On August 31, 2007, the parties to the underlying litigation,
including Lakeside, reached a confidential
settlement agreement as to all claims.
Lakeside notified Liberty of the details of the settlement and requested
contribution; Liberty declined based on the absence of evidence as to coverable
damages. In total, Lakeside paid
approximately $1,070,000 for attorney fees to defend the underlying litigation,
and Liberty contributed $160,000 toward the fees.
¶16 On October 25, 2007, Lakeside filed a complaint against Liberty
for breach of its duty to defend and bad faith.
Lakeside asserts that Liberty’s response after being notified of
Lakeside’s lawsuit was impermissibly slow, incomplete, and in bad faith. Additionally, Lakeside asserts that Liberty’s
failure to pay anything other than a small portion of the total cost of
Lakeside’s counsel was a violation of Liberty’s duty to defend.
¶17 On November 7, 2007, Liberty
filed its answer and affirmative defenses to Lakeside’s
complaint. Later, on February 21, 2008,
Liberty filed an amended answer and affidavits.
In its answer, Liberty denied any liability or wrongdoing. Then, on November 4, 2008, Liberty filed a
counterclaim against Lakeside requesting an allocation to determine what
portion of defense costs incurred in the underlying litigation were for claims
that were not potentially covered by Liberty’s policy. Liberty also requested full reimbursement of
all attorney fees and costs incurred during the underlying Lakeside litigation.
¶18 The trial court determined that the undisputed facts
established that Liberty reserved rights to
question coverage and allowed Lakeside to
control its own defense. Additionally,
the trial court found that Lakeside and Liberty agreed on a method of
reimbursement which was memorialized in Baker’s claim files. Further, the court stated that even if the
agreement had not been reached, California law
would require the dispute to be determined under California’s Cumis statute. Liberty asserts that California
law should apply while Lakeside argues that Wisconsin
law should apply. The court stated that the length of time it
took Liberty to acknowledge its duty to defend could not support a breach of the
duty to defend. Finally, the trial court
determined that Lakeside’s bad faith claim could not be supported by the facts.
¶19 On April 20, 2009, the trial court entered an order (1) denying
Lakeside’s motion for partial summary judgment, (2) granting Liberty’s motion
for summary judgment, (3) dismissing Lakeside’s bad faith and breach of
contract claims, and (4) dismissing Liberty’s counterclaim. On June 8, 2009, the trial court entered
judgment consistent with its April 20 order and also awarding costs to Liberty. Lakeside
appeals.
¶20 Additional
facts relevant to the various legal issues are presented in the discussion of
each issue below.
DISCUSSION
¶21 We review
a grant or denial of summary judgment de novo, using the same methodology as
the circuit court. M & I First Nat’l Bank v.
Episcopal Homes Mgmt., Inc., 195 Wis.
2d 485, 496-97, 536 N.W.2d 175 (Ct. App. 1995). We need not recite the details
of the methodology here other than to point out that summary judgment
methodology prohibits the circuit court from deciding questions of fact. Preloznik v. City of Madison,
113 Wis. 2d
112, 116, 334 N.W.2d 580 (Ct. App. 1983). The methodology is intended to prevent a trial
on affidavits and depositions. State
Bank v. Elsen, 128 Wis.
2d 508, 511, 383 N.W.2d 916 (Ct. App. 1986).
Summary judgment is not to be used as a short cut to avoid a full trial
where a factual dispute exists. Id. The moving party bears the burden of
demonstrating the absence of a genuine issue as to any material fact with such
clarity as to leave no room for controversy. See Grams
v. Boss, 97
Wis. 2d 332, 338, 294 N.W.2d 473 (1980), abrogated
on other grounds by Olstad v. Microsoft Corp., 2005 WI
121, 284 Wis. 2d 224, 700 N.W.2d 139. The
inferences to be drawn from the moving party’s proofs should be viewed in the
light most favorable to the party opposing the motion and doubts as to the
existence of a genuine issue of material fact should be resolved against the
party moving for summary judgment. Id. at
338-39.
Choice of Law
¶22 At the
outset, we address Lakeside’s contention that Wisconsin law governs its claims
against Liberty
based on breach of the duty to defend. Liberty
contends that this is nothing more than an attorney fee dispute that is
governed by California
law. However, the dispute regarding the
payment of attorney fees stems from a disagreement regarding Liberty’s duty to
defend—who was entitled to control Lakeside’s defense, choose counsel, and what
Liberty owed as its duty to defend following its reservation of rights. We agree with Lakeside that this dispute is
governed by Wisconsin law.
¶23 The CGL
policy issued to Lakeside insures “all operations of the named insured.” The policy provides: “We will pay those sums that the insured
becomes legally obligated to pay as damages because of ‘bodily injury’ or
‘property damage’ to which this insurance applies. We will have the right and duty to defend the
insured against any ‘suit’ seeking those damages.” The policy applies to “bodily injury” and “property
damage” only if it is “caused by an ‘occurrence’ that takes place in the
‘coverage territory’[.]” The “coverage
territory” is defined by the policy as “[t]he United
States of America (including its territories and possessions),
Puerto Rico and Canada,” and
when the injury or damage arises out of products or goods made in the United States,
the coverage extends throughout the world. Although the policy insures a broad coverage
territory, the policy does not contain a “choice of law” provision.
¶24 A choice-of-law
determination is a question of law subject to independent appellate review. Drinkwater v. American Family Mut. Ins. Co.,
2006 WI 56, ¶14, 290 Wis.
2d 642, 714 N.W.2d 568. When an
insurance contract does not contain a choice of law provision, Wisconsin courts employ a “grouping of contacts” approach
for resolving conflict of law questions. Bradley Corp. v. Zurich Ins. Co.,
984 F.Supp. 1193, 1197 (E.D. Wis. 1997) (addressing applicable law in a CGL
policy dispute). “The approach includes
looking at the place of contracting, negotiation, and performance of the
contract, the location of the insured risk, and the domicile of the parties to
the agreement.” Id.
(citing Utica Mut.
Ins. Co. v. Klein & Son, Inc., 157 Wis. 2d 552, 556-58, 460 N.W.2d 763 (Ct. App. 1990)); see
also Sybron Transition Corp. v. Security Ins. Co., 107 F.3d 1250,
1255 (7th Cir. 1997).
¶25 The grouping of contacts rule was later explained
and employed in State Farm Mutual Automobile Insurance Co. v. Gillette, 2002 WI
31, 251 Wis.
2d 561, 641 N.W.2d 662. There, the court
instructed:
To determine
which jurisdiction’s law applies to a contractual dispute, we look to Wisconsin contract choice of law rules. In contractual disputes, Wisconsin
courts apply the “grouping of contacts” rule, that is, that contract rights
must be “determined by the law of the [jurisdiction] with which the contract
has the most significant relationship.”
Id., ¶26 (footnotes omitted). The Gillette court determined that
because the insurance policy was issued in Wisconsin
between an insurance company doing business in Wisconsin
and a Wisconsin resident, and because the policy covered cars registered in Wisconsin, Wisconsin
was the state with which the policy had its most significant relationship. Id.,
¶27. The court determined that Wisconsin law governed the interpretation of the
insurance policy. Id.
¶26 We reach
the same conclusion in this case. The
facts demonstrate that the CGL policy at issue has its greatest contacts with Wisconsin. The record establishes that Liberty is
incorporated in and does business in Wisconsin;
Lakeside is a Wisconsin corporation with its principal place of business in
this state; and the policy issued by Liberty was sold, negotiated, and
delivered in Wisconsin.
This dispute involves the duties and
obligations of Liberty to Lakeside under the CGL policy and the relationship
between those parties has its greatest contacts in Wisconsin.
See Sybron, 107 F.3d at 1256
(some of the insured occurrences and claims could arise from the insured’s
activities and subsidiaries outside of the state, but the place of contracting
is the state with the most significant relationship with the parties and the
policy) (citing Urhammer v. Olson, 39
Wis. 2d 447, 159 N.W.2d 688 (1968) (the place of the accident is irrelevant
factor in deciding which law governs insurance agreement)).
¶27 While the
underlying products liability litigation happens to be in California,
Lakeside’s product manufacturing activities related to the litigation occurred
in Wisconsin. The policy insures all of the operations of Lakeside,
a Wisconsin corporation with its principal place of business in Wisconsin, and
the coverage territory for injury or damages arising out of goods or products
sold extends throughout the world. The
contract covers a group of risks with no particular location of insured
risk. We agree with Lakeside
that it would undermine predictability and uniformity to require the
interpretation of the parties’ insurance contract to be governed by the law of
the location of each and any particular lawsuit.
¶28 Liberty contends that this case is identical to Spic
and Span, Inc. v. Continental Casualty Co., 203 Wis.
2d 118, 552 N.W.2d 435 (Ct. App. 1996), and
therefore California
law applies. We disagree. In Spic and Span, the court expressly
declined to address Spic and Span’s objection to the application of California law based on its concern that “California’s limitation on independent counsel selected
by the insured would undermine Wisconsin policy and the intentions and
expectations of the parties to insurance policies negotiated, sold and issued
in Wisconsin.” Id.
at 128. The court determined that Spic
and Span had tacitly accepted California law
for the calculation of defense compensation and, therefore, waived its
challenge to the application of California
law. Id. at 128, 132. Liberty
contends that Lakeside, like Spic and Span, also
waived its objection.
¶29 In
support of its argument, Liberty references correspondence to Lakeside dated
December 4, 2006, in which it states, “It is our position that Lakeside’s
ability to select their own counsel is dictated by the ‘Cumis’ statute-California
Civil Code section 2860. Since we have
agreed to defend our insured, we have the right to choose counsel.” However, in that same letter, as well as
others, Liberty discusses its coverage obligations citing Wisconsin
law. Moreover, while Liberty
contends that Lakeside never objected to the application of California law, the parties’ correspondence
indicates that this was an ongoing dispute.
On November 28, 2006, prior to Liberty’s
correspondence, Lakeside advised Liberty,
“Lakeside objects to Liberty’s attempt to
appoint counsel of its choice for Lakeside for
numerous reasons. First, it is
Lakeside’s position that because Liberty has
reserved rights in this matter, Lakeside has
the right to control the defense.” Then,
after receiving Liberty’s December 6, 2006
correspondence, Lakeside again advised Liberty,
“It is Lakeside Foods’ position that based on Liberty’s
reservation of rights, Lakeside Foods has the right to control the defense and Liberty has the obligation
to pay for that defense based on the CGL policy. I understand Liberty disagrees with that contention.” Moreover, the discussions reflect an ongoing
dispute about Liberty’s
desire to impose its panel counsel rates.
No party indicated that the disagreement should be resolved by binding
arbitration pursuant to the Cumis statute. See Cal. Civil
Code § 2860(c) (2010).
¶30 While not
specifically referencing either California or
Wisconsin state law, it is clear that Lakeside’s position is firmly based in
the application of Wisconsin law. Contrary to Liberty’s
assertions, the facts do not establish as a matter of law that Lakeside tacitly
(much less intentionally) agreed to the application of California law such that it waived its
objection under Spic and Span. Rather,
the parties’ dispute as to the duty to defend under the CGL policy and the
resulting obligation to pay attorney fees was, and is, ongoing. We conclude that this contractual dispute is
governed by Wisconsin law. See
Gillette,
251 Wis. 2d
561, ¶27.
Breach of Duty to
Defend
¶31 Contracts
for insurance typically impose two main duties: the duty to indemnify the insured against
damages or losses, and the duty to defend against claims for damages. Johnson Controls, Inc. v. London Market,
2010 WI 52, ¶28, No. 2007AP1868. These
duties present separate contractual obligations. Id. “In Wisconsin,
the duty of an insurer to provide a defense to its insured is determined by the
complaint and not by extrinsic evidence.
If there are allegations in the complaint which, if proven, would be
covered, the insurer has a duty to defend.”
Grube v. Daun, 173 Wis.
2d 30, 72, 496 N.W.2d 106 (Ct. App. 1992) (citations omitted). When an insurance policy provides coverage
for even one claim, the insurer is obligated to defend the entire lawsuit. Fireman’s Fund Ins. Co. v. Bradley Corp.,
2003 WI 33, ¶21, 261 Wis. 2d 4, 660 N.W.2d 666.
An insurance company that disputes coverage, and thus
the duty to defend, has several choices. The company may enter into a nonwaiver agreement
with the insured wherein the insurer would agree to defend and the insured
would acknowledge the right of the insurer to contest coverage. The company may
seek to bifurcate the trial and obtain a declaratory judgment on coverage in
advance of the determination of liability. The company may defend the insured under a
reservation of rights, that is reserving its right not to pay a judgment if it
is determined that coverage does not exist.
Or, the company may decline to defend and risk the consequences.
Southeast Wisconsin Prof’l
Baseball Park Dist. v. Mitsubishi Heavy Indus. Am., Inc., 2007 WI App
185, ¶42, 304 Wis. 2d 637, 738 N.W.2d 87 (citations omitted). When an insurer reserves rights the insured
has the right to control the defense. See Radke v. Fireman’s Fund Ins. Co.,
217 Wis. 2d 39, 45, 577 N.W.2d 366 (Ct. App.
1998); Jacob v. West Bend
Mut. Ins. Co., 203 Wis. 2d 524, 536, 553 N.W.2d 800 (Ct. App. 1996) (the
insurer may give the insured notice of the insurer’s intent to reserve its
coverage rights, which allows the insured the opportunity to a defense not
subject to the control of the insurer although the insurer remains liable for
the legal fees incurred). Further, when
an insurer determines to reserve its right to contest coverage, it must provide
a defense “immediately” or use alternate methods to reduce costs until coverage
is decided. See Grube, 173 Wis. 2d at 75-76.
¶32 The
parties do not dispute that Liberty had a duty
to defend Lakeside; Liberty
acknowledged its duty, and reserved its rights.
Liberty also acknowledges that generally,
under Wisconsin law, based on a reservation of rights, an insured is entitled
to control the defense, but contends that this is a nonissue because Liberty permitted Lakeside
to proceed with its chosen counsel. However,
Lakeside contends that Liberty breached its duty
to defend Lakeside by “refusing to provide an immediate or complete defense and
by attempting to force Lakeside into an
agreement to accept less than the full defense to which it was contractually
entitled.” Lakeside’s claims relate to
both the timeliness of Liberty’s determination
as to its duty to defend and also to its attempt to impose its choice of panel counsel
on Lakeside, as well as paying only a portion of Lakeside’s
attorney fees. Liberty
acknowledges the parties’ disagreements, but responds that the parties arrived
at an oral agreement which resolved the issues surrounding Lakeside’s
defense and provided for the payment of attorney fees from the time of tender
through settlement.
1. The Existence of an Oral Agreement
¶33 Lakeside
contends that Liberty breached its duty to
defend by refusing to provide a complete defense subject to its control,
including choice of counsel, at Liberty’s
expense. Because the facts demonstrate
that Liberty ultimately conceded to the use of Lakeside’s counsel, our initial inquiry involves the
parties’ oral fee arrangement and whether there exists a genuine issue of
material fact as to whether the arrangement was intended to be final or whether
the parties contemplated a temporary arrangement.
¶34 On
summary judgment, Liberty asserted that it had come to a final agreement with Lakeside
in December 2006 regarding fees, and that after Lakeside settled the litigation
in August 2007, Lakeside reneged on the cost sharing agreement. In support of its contention that an oral
agreement existed, Liberty cites to deposition
testimony from Lakeside’s representative Russell Schmidt who acknowledged that Liberty would pay Turner
Green $135 per hour and that this was never classified as “temporary.” However, Schmidt testified that it was never
classified as “permanent” either and he disputed its application to Michael
Best, stating that Michael Best was not “on the table” during his discussions
with Liberty’s claims handler. Liberty also cites to the fact that, from March 2007
forward until the conclusion of the litigation, Lakeside billed Liberty for Turner Green’s
services at a rate of $135 per hour.
¶35 Lakeside contends that the undisputed evidence
demonstrates that the parties had not reached a final agreement. We agree that there is a material issue of
fact as to this issue. “Where the terms
of an oral contract are to be gathered from conduct and conversations, or where
they are in dispute, or are ambiguous or vague, the question as to what the
understanding or agreement in fact was is a question for the jury.” James v. Carson,
94 Wis. 632,
636-37, 69 N.W. 1004 (1897).
¶36 The
record does not contain, and Liberty
concedes that there does not exist, a written agreement as to the payment of
attorney fees. The evidence Liberty relies on to
support the existence of an oral agreement consists primarily of Baker’s
internal notations which memorialize his understanding of conversations with,
and voice mails received from, the insured.
¶37 In
response, Lakeside points to an internal notation dated December 20, 2006, in
which Baker indicates that Schmidt advised Baker that he would be receiving
“something in writing from [] Krutz” which, Baker noted, would “hopefully”
reflect Liberty’s understanding with the insured. Liberty
never received a written agreement from Krutz.
To the contrary, in correspondence to Liberty
dated January 2007, Krutz identifies a continued dispute regarding the
sufficiency of Liberty’s actions in supporting Lakeside’s defense, including the payment of attorney
fees. Krutz requests a meeting to
“review facts and issues concerning coverage and defense” and states that “[i]n
the meantime, Lakeside Foods expects Liberty to pay the full cost of defense
including Michael, Best & Friedrich’s fees, Attorney Todd Green’s full
rate, and the disbursement costs ….” Thus,
rather than document a final agreement, Krutz’s correspondence clearly sets
forth Lakeside’s position that the parties had
not reached a final agreement. Indeed,
the only facts of record as to whether the parties intended to reach a final
agreement orally or in writing are gleaned from the internal file notations of Baker
on December 20, 2006, who was told by the insured that he would be receiving
“something in writing,” and who anticipated that the agreement would be
confirmed in writing. Further, the next
day, on December 21, 2006, Baker sent an email to another Liberty employee asking for approval of the retention
of Turner Green.
¶38 In light
of Krutz’s January correspondence and the lack of a written agreement, we
conclude that a genuine issue of material fact exists as to whether the parties
had reached a final agreement as to the payment of attorney fees, either for
Michael Best as lead counsel or Turner Green as local counsel, or whether they
had simply reached a temporary fee arrangement.
Moreover, at best, the evidence submitted is inconclusive as to whether
the conversations between Schmidt and Baker resulted in an oral agreement or
whether they were merely preliminary negotiations looking forward to the
execution of a written document. See Johann v. Milwaukee Elec. Tool Corp.,
270 Wis. 573,
589, 72 N.W.2d 401 (1955). Further, even if we were to conclude that an
agreement exists, and we do not, there are genuine issues of material fact as
to the scope and terms of the agreement, for example, whether the agreement was
intended to date back to the period between the date of tender by Lakeside and
Liberty’s reservation of rights or following the December negotiations.
¶39 Depending
on the fact finder’s determination on remand, the issue of attorney fees may be
resolved. However, if the fact finder
determines that the rate schedule was only temporary, the court will have to
determine Liberty’s
obligation for attorney fees from the time of tender until the resolution of
litigation. Whether the requested
compensation for attorney fees is reasonable is a question of fact to be
addressed by the trial court following consideration of the factors in SCR
20:1.5 (2010), which includes the fees customarily charged in the locality for
similar service, SCR 20:1.5(a)(3). See
Wright
v. Mercy Hosp. of Janesville, Wis., Inc., 206 Wis. 2d 449, 470, 557
N.W.2d 846 (Ct. App. 1996); Fireman’s Fund Ins. Co. v. Bradley Corp.,
261 Wis. 2d 4, ¶67; see also HK
Sys., Inc. v. Admiral Ins. Co., 2005 WL 1563340 at 18, 19 (E.D. Wis.
2005) (applying Wisconsin law, holding that an insurer’s responsibility for
defense costs extends only to a reasonable charge and the market standard for
attorney rates for a particular type of litigation in a particular geographic
area is a question of fact preventing the grant of summary judgment); see also 14 Lee R. Russ & Thomas F.
Segalia, Couch on Insurance § 202:35, at 202-87 (3d ed. 1999) (“An
insurer’s obligation to reimburse independent counsel is limited to reasonable
attorney’s fees and disbursements.”)
2. Timeliness of Liberty’s Response
¶40 We turn
next to Lakeside’s claim that Liberty
breached its duty to defend by failing to provide an immediate response to its
tender of coverage. See Grube, 173 Wis.
2d at 75 (insurers must provide a defense “immediately” or use alternate
methods to reduce costs until the coverage issue is decided). In doing so, we note that the viability of Lakeside’s claim as to timeliness could also depend on
the fact finder’s ultimate determination as to the existence and scope of the
oral agreement. However, because we find
no explicit communications evidencing a meeting of the minds that a fee
arrangement resolved all defense obligations from the date of tender, we
address this issue as well.
¶41 Here, the
undisputed facts establish that Lakeside tendered its defense to Liberty on June 30, 2006, four days after the filing of a
cross-complaint against Lakeside in the
underlying litigation. Lakeside’s tender
included the cross-complaint and notified Liberty
that its answer in that litigation was due on July 26, 2006. Liberty did
not acknowledge Lakeside’s tender until July 25, 2006, when it notified Lakeside that it had “initiated a coverage investigation”
and requested a copy of the original complaint.
Liberty did not inform Lakeside
of its position as to coverage and its reservation of rights until September
14, 2006.
¶42 Lakeside
contends that Liberty’s investigation, which involves examining the complaint
to determine whether it contains allegations that, if true, would trigger
coverage, see Liebovich v. Minnesota Ins. Co.,
2008 WI 75, ¶16, 310 Wis.
2d 751, 751 N.W.2d 764, should have been brief, taking hours, not weeks, to
decide. Lakeside
asserts that “waiting nearly three months after tender of a $26 million lawsuit
to accept defense of the matter and waiting eight months after tender to
actually begin to fund a minor portion of the defense is not defending an
action ‘immediately.’” Not surprisingly,
Liberty
contends it was not precluded from requesting more information or performing
its own investigation before accepting the tender. Lakeside responds that Liberty’s request for information and
investigation should have occurred more quickly.
¶43 In
briefing the issue of timeliness, neither party points to any case law
indicating what length of time is acceptable for an insurer’s response. It is undisputed that, by mid-September, Liberty had acknowledged its duty to defend Lakeside. Lakeside’s
initial correspondence with Liberty
indicated that it had counsel, Krutz, who would be preparing a responsive
pleading. Therefore, during the pendency
of its coverage investigation, Liberty knew that
Lakeside was represented by counsel, and presumably knew that it would be
obligated to pay Lakeside’s fees dating back
to the tender of defense. While Lakeside
understandably may have preferred a more prompt response from Liberty,
Lakeside has not identified any prejudice or
damages suffered as a result of the delay.
Indeed, it was well represented by its counsel of choice. We cannot say that Lakeside has established a
breach of Liberty’s duty to defend as a matter
of law based solely on the timeliness of Liberty’s
response to tender. However, should the
fact finder determine the absence of the oral agreement, timeliness may be
considered as to whether Liberty’s actions, when
viewed as a whole, amounted to a bad faith handling of Lakeside’s
claim.
Bad Faith
¶44 Lakeside contends that the trial court additionally erred
in granting summary judgment on the issue of bad faith. “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.” Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 691, 271
N.W.2d 368 (1978). “[B]ad faith conduct
by one party to a contract toward another is a tort separate and apart from a
breach of contract per se and ... separate
damages may be recovered for the tort and for the contract breach.” Id.
at 686. “[T]he tort of bad faith is not
a tortious breach of contract. It is a
separate intentional wrong, which results from a breach of duty imposed as a
consequence of the relationship established by contract.” Id.
at 687. Generally, in bad faith
insurance actions, the tort of bad faith stems from a breach of the fiduciary
duty the insurer owes its insured resulting from the relationship created by
the insurance contract. See Combined Investigative Servs., Inc. v.
Scottsdale Ins. Co., 165 Wis. 2d 262, 270, 477 N.W.2d 82 (Ct. App.
1991).
¶45 Lakeside
argues that there is “ample evidence from which a jury could conclude that
Liberty lacked a reasonable basis for denying Lakeside the benefits of its
policy—most significantly, a timely and full defense—and that Liberty knew that
it lacked a reasonable basis for denying such benefits to Lakeside.” Liberty contends that Lakeside’s bad faith
claim is not recognized by Wisconsin courts because it does not fall within the
three scenarios of insurer bad faith previously addressed in case law and the Wisconsin
Jury Instructions. However, Liberty’s argument was
recently rejected in Roehl Transport, Inc. v. Liberty Mutual Insurance
Co., 2010 WI 49, ¶36, No. 2008AP1303.
There, the supreme court observed that the tort of bad faith is not
“confined to the three fact patterns described in the existing case law.” Id. We therefore turn to the possible merits of Lakeside’s claim and the propriety of summary judgment.
¶46 Here, the
record reflects that while denying Lakeside’s right to continue with its chosen
counsel, Liberty’s internal correspondence
indicates its understanding that Lakeside may
have the right to control its defense. Liberty then
informed Krutz that if Lakeside wished to
continue with Michael Best as lead counsel it would be responsible for all
Michael Best’s fees and costs. Lakeside
contends that bad faith on the part of Liberty is also evidenced by failing to
respond to Lakeside’s tender for eleven weeks, leaving Lakeside to fund the
entirety of its defense; attempting to coerce Lakeside into relinquishing its
right to control its defense by threatening to withhold financial assistance in
paying legal fees; and by ultimately paying for only twenty percent of the
legal fees incurred in defending the underlying action and refusing to
contribute monies to the settlement. Lakeside submitted a detailed expert opinion
documenting the manner in which Liberty
“breached its insurance policy obligations and acted in bad faith” toward Lakeside.
¶47 Lakeside’s
claims as to bad faith relate to both the timeliness of Liberty’s determination
as to its duty to defend and also to its attempt to impose its choice of panel
counsel on Lakeside, as well as paying only a portion of Lakeside’s
attorney fees. Liberty argues
that Lakeside’s contentions are addressed, and
were resolved, by an oral agreement purportedly reached by the parties in early
December 2006. Liberty strenuously disputes that its actions
amounted to a wrongful denial of its duties under the contract such that it
acted in bad faith.
¶48 Bad faith
has been described by our supreme court as follows:
“[B]ad faith is the absence of honest, intelligent action
or consideration based upon a knowledge of the facts and circumstances upon
which a decision in respect to liability is predicated.” There is a duty of
ordinary care and reasonable diligence on the part of an insurer in handling
claims, and it must exercise an honest and informed judgment…. “In short, it is proper when applying the bad
faith test to determine whether a claim was properly investigated and whether
the results of the investigation were subjected to a reasonable evaluation and
review.”
Trinity Evangelical Lutheran
Church v. Tower Ins. Co., 2003 WI 46, ¶34, 261 Wis. 2d 333, 661 N.W.2d
789 (citations omitted). “Bad faith is a
determination to be made by the trier of fact.”
Mowry v. Badger
State Mut. Cas. Co.,
129 Wis. 2d
496, 517, 385 N.W.2d 171 (1986); see also
Baker
v. Northwestern Nat’l Cas. Co., 26 Wis.
2d 306, 314-15, 132 N.W.2d 493 (1965) (explaining that the issue of bad faith
is a matter for the jury), overruled on
other grounds by DeChant v. Monarch Life Ins. Co.,
200 Wis. 2d
559, 547 N.W.2d 592 (1996).
¶49 Based on
the disputed issues discussed earlier as to whether an oral agreement existed
which comprehensively resolved the parties’ dispute regarding Liberty’s defense
obligation, we agree with Lakeside that genuine issues of material fact could exist
as to whether Liberty fulfilled its duty of ordinary care and diligence in
handling Lakeside’s claim, and whether it exercised honest and informed
judgment in doing so. As such, we reverse
the trial court’s grant of summary judgment on this issue as well and remand
for further proceedings.
CONCLUSION
¶50 The
overarching issue in this case is whether summary judgment was
appropriate. Because Liberty
failed to demonstrate the absence of a genuine issue as to any material fact
with such clarity as to leave no room for controversy, see Grams v. Boss, 97 Wis.
2d at 338, we conclude that it was not.
Based on our review of the summary judgment record, we conclude that there
are genuine issues of material fact as to whether the parties arrived at a
final oral agreement resolving all defense issues and, if so, what constituted
the terms of that agreement. We further
conclude that there are disputed issues of material fact as to whether Liberty acted in bad
faith. As to choice of law, we conclude
that the trial court erred in its determination that California law applies to this dispute. Finally, we uphold the trial court’s
determination that Liberty did not breach its
duty to defend solely on the grounds that it took three months to respond to Lakeside’s tender of defense. We therefore reverse the trial court’s grant
of summary judgment in favor of Liberty
and remand for further proceedings consistent with these holdings.
By the Court.—Judgment affirmed in part,
reversed in part and cause remanded.
Not
recommended for publication in the official reports.