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COURT OF
APPEALS DECISION DATED AND
RELEASED November
14, 1996 |
NOTICE |
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A party may file with the Supreme Court a petition to review an
adverse decision by the Court of Appeals.
See § 808.10 and Rule
809.62, Stats. |
This opinion is subject to further editing. If published, the official version will appear in the bound
volume of the Official Reports. |
No. 95-1763
STATE OF WISCONSIN IN
COURT OF APPEALS
DISTRICT IV
ECONOMY
PREFERRED INSURANCE COMPANY,
a
foreign insurance corporation,
Plaintiff-Respondent,
v.
EDWARD
A. SOLNER and GEORGE D. SOLNER,
d/b/a
Solner & Associates,
Defendants-Appellants,
SMITH PLUMBING & HEATING COMPANY,
and MATTHEW P. FLYNN,
Defemdants.
APPEAL
from an order of the circuit court for Dane County: GERALD C. NICHOL, Judge. Reversed.
Before
Dykman, P.J., Vergeront, J., and Robert D. Sundby, Reserve Judge.
SUNDBY,
J. In this declaratory judgment action,
Economy Preferred Insurance Company sought to establish that its liability
insurance policy did not cover the possible liability of its insured Edward
Solner[1]
in Flynn v. Solner, No. 90-CV-3567 (Dane Cty. Cir. Ct.
1992). This action was dismissed by the
trial court May 9, 1995, on its own motion under § 805.03, Stats., because Economy failed to
prosecute the action. However, the
court denied Solner's motion for attorney fees because it concluded that Elliott
v. Donahue, 169 Wis.2d 310, 485 N.W.2d 403 (1992), did not permit the
court to award such fees where the coverage issue was mooted by a judicial
determination of the underlying action.
In
Elliott, the Wisconsin Supreme Court held that supplemental
relief under § 806.04(8), Stats.,
of the declaratory judgment act included the award to the insured of his
attorney fees where the insured successfully established coverage under an
insurance policy. Id. at
324, 485 N.W.2d at 409. The trial court
concluded that Elliott did not permit it to deviate from the
so-called American Rule that each party must bear his or her attorney fees
because here the insured did not successfully establish coverage. We hold that where an insurer denies
coverage and forces its insured to incur attorney fees and costs of litigation
to defend the insurer's declaratory judgment action, it cannot avoid exercise
of the trial court's discretion under § 806.04(8), Stats., by failing to prosecute the action. We therefore reverse the judgment insofar as
it denied the insured's motion for attorney fees. We further conclude that had the trial court exercised its
discretion under § 806.04(8), it would have erroneously exercised that
discretion had it denied the insured's motion.
We therefore remand the cause to the trial court to determine and award
Solner his reasonable attorney fees and costs of litigation in this
action.
Background
Economy
undertook the defense of its insured Edward Solner in Flynn under
a reservation of rights. When Dane
County Circuit Court denied its motion for summary judgment, Economy began this
action on December 10, 1991, in Milwaukee County Circuit Court to establish its
coverage defenses. However, when Dane
County Circuit Court reversed itself and Flynn dropped his only remaining
claim, Economy informed Milwaukee County Circuit Court that it would dismiss
this action without prejudice. Economy
would not dismiss the action with prejudice because it wished to reassert its
coverage defenses if the circuit court's order was reversed on appeal.
However,
Solner would not stipulate to dismiss this action without prejudice unless
Economy agreed to pay its attorney fees and costs of litigation. Economy then informed Milwaukee County
Circuit Court that it could not get a stipulation to dismiss this action
without prejudice and therefore continued the action. It did agree to change venue to Dane County and an order for that
purpose was entered November 13, 1992.
Economy
did not thereafter pursue this action and Dane County Circuit Court placed the
action on its dismissal calendar on March 31, 1994. The court's notice stated that it was proceeding pursuant to §
805.03, Stats., and it would hear
the dismissal motion May 26, 1994. On
April 1, 1994, Solner informed the circuit court by letter that he objected to
dismissing this action without an award of attorney fees. On December 21, 1994, Solner's attorney
informed Economy by letter that Solner would stipulate to dismissing this
action upon payment of legal fees of $1,200.74. On December 27, 1994, Economy responded that it did not believe
that Solner had a claim for attorney fees under § 805.04(2), Stats.
That statute applies to voluntary dismissals and not dismissals for want
of prosecution under § 805.03, Stats. In any event, Economy refused to pay any of
Solner's attorney fees in this action.
Dane
County Circuit Court again placed this case on its dismissal calendar and
scheduled a hearing on the dismissal for February 21, 1995. On February 8, 1995, Solner moved the court
for an order granting him "default" judgment dismissing this action
and awarding him actual reasonable attorney fees, costs and disbursements
pursuant to §§ 805.03, Stats.,
and 804.12(2)(a)3., Stats., or in
the alternative, pursuant to § 806.04(8) or § 814.025, Stats. Solner has
abandoned his claim for costs and attorney fees under § 814.025, Stats.
On
April 20, 1995, the trial court entered its memorandum decision and order
dismissing this action. However, the
court denied Solner's motion for attorney fees.[2] The trial court stated that the issue was:
"Can Solner recover attorney fees from Economy under the reasoning in Elliott
even though there will not be a court adjudication on the coverage
issue?" The court held:
"Solner is not entitled to recover attorney fees from Economy in Elliott
since the issue of coverage was never determined before the case was dismissed
against Solner and Economy."
Decision
In
its memorandum decision, the trial court stated:
The American Rule requires that the Elliott
decision be read narrowly. Under a narrow
interpretation, Solner could not recover attorney fees unless there is a court
adjudication on the coverage issue indicating that Solner's policy with Economy
included the roofing accident.
The
court also concluded that it would be inequitable to grant Solner attorney fees
when Economy had not had an evidentiary hearing to determine whether Solner had
given Economy adequate notice of its possible exposure. We conclude that Elliott did
not preclude the trial court from awarding Solner attorney fees under §
806.04(8), Stats.
The
circuit court was rightly concerned with the fairness of the proceedings. However, it overlooked the fact that a
dismissal under § 805.03, Stats.,
is on the merits and that Economy was responsible for failing to obtain an
evidentiary hearing on the merits of its late-notice defense.
Section
805.03, Stats., provides:
For failure of any claimant to prosecute or for failure
of any party to comply with the statutes governing procedure in civil actions
or to obey any order of court, the court in which the action is pending may
make such orders in regard to the failure as are just, including but not
limited to orders authorized under s. 804.12(2)(a). Any dismissal under this section operates as an adjudication
on the merits unless the court in its order for dismissal otherwise specifies
for good cause shown recited in the order.
A dismissal on the merits may be set aside by the court on the grounds
specified in and in accordance with s. 806.07.
A dismissal not on the merits may be set aside by the court for good
cause shown and within a reasonable time.
(Emphasis added.)
The
circuit court did not specify that its dismissal was not an adjudication on the
merits. Therefore, its order precludes
Economy in any other action from asserting the coverage defenses it asserted in
this action.
The
Elliott court concluded that § 806.04(8), Stats., permitted recovery of attorney fees in that case
because "recovery is proper under the principles of equity." Elliott, 169 Wis.2d at 324,
485 N.W.2d at 409. The principles of
equity identified by the Elliott court arise because a liability
insurance policy "represents a unique type of legally enforceable
contract." Id. at
320, 485 N.W.2d at 407 (emphasis added).
"An insurer has a special `fiduciary' relationship to its insured
which derives from the great disparity in bargaining positions of the
parties." DeChant v. Monarch Life Ins. Co., 200 Wis.2d 559,
570, 547 N.W.2d 592, 596 (1996). The Elliott
court said that a reasonable person in the position of the insured would
believe that he or she would have to pay nothing more than the periodic premium
to obtain the benefits of indemnification and defense for claims described in
the policy. Elliott, 169
Wis.2d at 322, 485 N.W.2d at 408. The
court stated:
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.
Although
the Elliott court did not base its decision on the language of
the insurance contract it did state:
Courts in several other jurisdictions have held that
attorney fees are recoverable by the insured in defending against an insurer's
declaratory judgment action where the insurance policy provides reimbursement
for all reasonable expenses incurred at the request of the insurance
company.... Initiating an action which imposes an obligation on the part of the
insured to successfully defend coverage is the equivalent of requesting the
insured to incur reasonable expenses.
Id. at 319, 485 N.W.2d at 406-07.
Solner's
policy with Economy provided reimbursement to the insured for "all
reasonable expenses incurred by the insured at our request."
Economy
argues, "This case provides a textbook example of how an insurance company
should proceed when simultaneously faced with a coverage defense and liability
claim." Not according to the
supreme court. In Elliott,
the court relied on Mowry v. Badger State Mutual Casualty Co.,
129 Wis.2d 496, 385 N.W.2d 171 (1986), to explain the proper procedure when the
insurer denies coverage:
Contrary to Heritage's assertion, however, it did not
comply with the requirements of Mowry. While a bifurcated trial was ordered in this case, the coverage
and liability issues were litigated simultaneously, forcing Donahue to retain
counsel to simultaneously defend him in both aspects of the case. To be entirely consistent with Mowry,
the insurer should not only request a bifurcated trial on the issues of
coverage and liability, but it should also move to stay any proceedings on
liability until the issue of coverage is resolved.
Elliott, 169 Wis.2d at 318, 485 N.W.2d at 406 (emphasis added).
We
recognize that the insurer in Elliott failed to provide its
insured with a defense, while Economy provided Solner with a defense, albeit
under a reservation of rights. However,
the most efficient and least costly procedure is to resolve any issue as to
coverage before litigating the liability question. This is not merely a "chicken-or-egg" choice; even
where the insurer provides a defense, the threat of no coverage cannot help but
affect the cooperative spirit with which the insurer and insured should approach
the liability defense. The insured is
entitled to the most vigorous defense the insurer can make on the insured's
behalf. We do not fault the defense
Economy provided Solner, but we believe that the interests of justice will be
best served if the coverage "decks" are cleared before the liability
issue is faced. Further, we do not
believe it is fair to require the insured to invest the economic and emotional
resources that participating in the liability trial requires. Solner was forced to endure almost four
years of uncertainty as to his possible ruinous liability.[3] In short, we do not believe that Economy's
"ace-in-the-hole" strategy is in the best interest of the parties or
the civil justice system.
The
trial court concluded that it was not equitable to require Economy to pay
Solner's attorney fees because there were issues as to reasonableness of notice
and prejudice which only a jury could resolve.
However, the burden of advancing a case for trial remains with the party
instituting the action. Gawin v.
Redevelopment Auth. of City of Milwaukee, 52 Wis.2d 380, 385, 190
N.W.2d 201, 204 (1971). The undisputed
facts show that Economy made no effort to advance this case for trial for
almost four years. We consider it inequitable
to deny Solner an award of attorney fees because Economy, by its strategic
procrastination, prevented its coverage defenses from being tested.
Even
after the coverage issues became moot by reason of the favorable judicial
determination of our court and the supreme court, Economy did not move to
dismiss this action. Instead, it waited
until the trial court placed this action on its dismissal calendar under §
805.03, Stats. This curious reluctance is explainable when
the history of Economy's effort to have this action dismissed without prejudice
is considered.
After
the favorable determination by Dane County Circuit Court, Economy received an
order from Milwaukee County Circuit Court setting a pretrial conference in this
case for November 12, 1992. On
September 17, 1992, Economy's counsel informed the company that he had received
the scheduling order and suggested that Economy simply dismiss the action
without prejudice. He stated: "We
can always file the action again later on, if necessary." By letter of September 23, 1992, Economy's
counsel informed the court that Economy would "voluntarily dismiss this
case without prejudice and I am in the process of circulating a stipulation to
that end." However, Solner
informed Economy that he would argue to the court that Economy should pay his
attorney fees to protect him if Economy recommenced this action and
"inflict[ed] duplicate fees on the Solners at a future date." On October 26, 1992, Economy responded,
"On a dismissal without prejudice you are probably entitled to costs,
disbursements and the nominal statutory attorney fee." (Emphasis added.)
On
October 29, 1992, Solner replied, "On dismissal without prejudice, ...
[t]he court can impose the actual reasonable attorneys' fees expended, as a
condition of the dismissal." On
November 3, 1992, Economy informed Solner, "I have checked the applicable
authority and you are correct that a court may condition a voluntary dismissal
on terms which the court deems proper, and these terms can include attorney
fees as a discretionary matter."
On November 9, 1992, Economy informed Milwaukee County Circuit Court,
"I was unable to achieve a voluntary dismissal of this case by
stipulation, since it will apparently proceed." By that letter, Economy enclosed an order for change of venue, which
the court entered November 13, 1992.
After the change of venue, Economy took no further action to advance
this case for trial, nor did it move to dismiss the action without
prejudice. Economy simply awaited what
might be.
Economy
now blames Solner's counsel for "eviscerat[ing] his client's claim for
attorney fees as a condition of dismissal." It points to its dismissal-without-prejudice letter of November
3, 1992, in which it advised Solner's counsel: "I have no idea what amount
of money you are seeking and would ask that you propose a number and brief
rationale. I will then relay that to
Economy in an effort to resolve this without court intervention."
Economy's
effort to shift the blame for its procrastination to Solner is
disingenuous. This action could not be
disposed of without "court intervention." Either the action would be dismissed without prejudice or with
prejudice. Most important, Economy did
not allow Solner's counsel time to respond.
Six days after its letter, Economy informed Milwaukee County Circuit
Court that it had been unable to achieve a voluntary dismissal and asked that
the case be transferred to Dane County.
The
only inference permissible from Economy's actions after it realized that it
would expose itself to the court's discretion under § 806.04(8), Stats., if it moved to voluntarily
dismiss this action is that it decided to keep this action alive as a fallback
defense if the Flynn appeal went against it. Even after this action became moot by a
final judicial determination dismissing Flynn's claims, Economy refused to
expose itself to the circuit court's discretion under the voluntary dismissal
statute, § 805.04, Stats.
Economy's
effort to avoid exercise of the trial court's discretion is unavailing. We conclude that Economy, by failing to
prosecute this action, could not prevent the trial court from exercising its
discretion to grant Solner supplemental relief pursuant to § 806.04(8), Stats.
Because we find ample discretion under the declaratory judgment act for
the trial court to grant Solner's motion for attorney fees and costs, we do not
decide whether the trial court could have granted his motion under § 805.03, Stats.
Because
the trial erroneously assumed it did not have authority under § 806.04(8), Stats., to award Solner attorney fees,
it did not exercise its discretion. See
State v. Wyss, 124 Wis.2d 681, 734, 370 N.W.2d 745, 770
(1985). We therefore review the record
de novo to determine whether the trial court would have erroneously exercised
its discretion if it had applied its discretion to deny Solner's request for
attorney fees under § 806.04(8). We
conclude that it would have. Economy
forced Solner to retain counsel to defend its denial of coverage in a forum
geographically favorable to it and to obtain an order changing venue to Dane
County, where the principal action was being tried. Economy refused Solner's reasonable request that it pay his
attorney fees as a condition of dismissal of the action without prejudice. Finally, it allowed this action to languish
until the Dane County Circuit Court twice placed this case on its dismissal
calendar under § 805.03, Stats. We conclude that principles of equity
support Solner's claim for his attorney fees and costs in defending this action
and appearing on the dismissal motions under § 805.03.
By
the Court.—Order reversed.
Recommended
for publication in the official reports.
No. 95-1763(D)
VERGERONT,
J. (dissenting). I respectfully dissent. I would not extend Elliott v. Donahue,
169 Wis.2d 310, 485 N.W.2d 403 (1992), to the circumstances of this case. I would affirm the trial court's decision.
In
Elliott, the insurance company did not provide a defense for the
insured in the bifurcated liability litigation until coverage was determined
and did not obtain a stay of the liability litigation until coverage was
determined. For that reason, the court
held, the insurance company was liable for the attorney fees incurred by the
insured in defending against liability before coverage was determined. Elliott, 169 Wis.2d at 318,
485 N.W.2d at 406. The court also
concluded that because the insured had prevailed in the coverage dispute, the
insurance company had to pay the reasonable attorney fees incurred by the
insured in defending on this issue. Id.
at 325, 485 N.W.2d at 409. The court
construed the insurance contract to provide that the insured had to pay nothing
more than the premiums in order to obtain the benefits of indemnification and
the defense for claims described in the policy. The court reasoned that if the insured had to expend money to
establish coverage for a claim that fell within the policy, the insured was not
receiving the benefit bargained and paid for under the policy. Id. at 322, 485 N.W.2d at
408. The court concluded that
"equity call[s] for the insurer to be liable to the insured for expenses,
including reasonable attorney fees, incurred by the insured in successfully
establishing coverage." Id. The court determined that § 806.04(8), Stats., permitting further relief in a
declaratory judgement action whenever just and proper, permitted a recovery of
attorney fees in this situation, and it was therefore unnecessary to fashion an
exception to the American Rule. Id.
at 324-25, 485 N.W.2d at 409.
In DeChant v. Monarch Life Ins. Co.,
200 Wis.2d 559, 547 N.W.2d 592 (1996), the Wisconsin Supreme Court declined to
extend Elliott to provide a basis for recovery of attorney fees
incurred by an insured in prosecuting a first-party action against an insurance
company for breach of contract and bad faith.
Id. at 569, 547 N.W.2d at 595. Instead, the court held that the insured could recover those fees
as part of the compensatory damages for the bad faith claim. Id. at 577, 547 N.W.2d at
599. In discussing Elliott,
the court said:
We agree ... that
our decision in Elliott stands for the proposition that courts
have the equitable power to award attorney's fees to insureds in limited
circumstances. However, our result in Elliott
was firmly grounded within the statutory authority found in Wis. Stat. §
806.04(8) (1993-94). Elliott
involved a declaratory judgment action in which the insurer breached its duty
to defend. Therefore, although some of
the rationale expressed in Elliott is supportive, we decline to
extend Elliott beyond its particular facts and circumstances.
Id. at 569, 547 N.W.2d at 595 (footnote omitted).
This
case, like Elliott, involves a declaratory judgment action. But the reason the Elliott
court determined that equity warranted invoking the supplementary relief
provisions of that statute was that the insured should not have to pay more
than premiums when there was coverage.
In the absence of a determination that there is coverage, I do not see
how it is possible to determine whether equity requires payment of the
insured's fees, as the majority opinion does.
For example, the majority considers it unreasonable for Economy not to
have paid the insured's attorney fees in the coverage dispute as a condition for
dismissing without prejudice the coverage action, initially filed in Milwaukee
County.[4] But Economy is not liable for those fees
unless there is coverage.
The
trial court concluded that Economy's position that there was no coverage was
not without a reasonable basis.[5] The Solners do not contend that Economy
acted in bad faith in contesting coverage or that the issue of coverage was not
fairly debatable. See Anderson
v. Continental Insurance Co., 85 Wis.2d 675, 687, 271 N.W.2d 368, 374
(1978). This is not a situation where
the insurer dragged its feet in resolving the coverage issue, leaving the
insured to defend itself in the liability action in the meantime. Unlike the insurer in Elliott,
Economy was providing a defense in the liability action before it began the
declaratory judgment action to determine coverage, and it continued to do so
until the liability action was resolved in the Solners' favor.
True,
if Economy had raised the coverage issue in the liability action in Dane County
rather than filing a separate action in Milwaukee County, the Solners would not
have needed to file a motion to change venue.[6] But the Solners are not claiming that
Economy's initial choice of venue did not meet the requirements of
§ 802.05(1), Stats.,[7]
or that Economy did not have the right to file a separate action. The attorney fees the Solners incurred in
answering the coverage complaint and defending when Solner was deposed in the
coverage action would presumably be the same whether that action was separate
or part of the liability case.
Although
the Solners and the majority find it unreasonable that Economy did not
vigorously prosecute the coverage action, I fail to see how that harmed the
Solners, given that Economy was already providing their defense. Perhaps Economy did decide that the
liability defense was stronger than its claim of no coverage and that it should
concentrate on the liability action, leaving the coverage dispute until
later. That does not indicate a lack of
good faith. The most that can be said
is that, had Economy prosecuted the coverage dispute to conclusion immediately
and had the Solners prevailed, the Solners would have been entitled under Elliott
to the attorney fees they now seek, as well as the much larger amount of
attorney fees they would have incurred in defending the coverage dispute to its
conclusion. The Solners did not incur
more attorney fees precisely because Economy did not move ahead with the
coverage action after deposing Solner.
Resolution of the coverage dispute was ultimately unnecessary given the
favorable outcome on liability.
There
may be cases in which equity would compel an extension of Elliott. However, in the absence of an indication
from the supreme court that Elliott is to be read broadly, I am
not persuaded that we should extend Elliott to apply in this case.
[1] Although Economy brought this action against
Edward A. Solner and George D. Solner, d/b/a/ Solner & Associates, the
briefs concentrate on the coverage questions as to Edward.
[2] The Order for Dismissal, entered May 10,
1995, reads:
WHEREAS, this
matter was scheduled for dismissal on the court's calendar, and
WHEREAS, the
defendants Edward A. Solner and George D. Solner filed a motion to recover
costs, disbursements, and actual attorney fees, and
WHEREAS, the court
heard oral arguments on the motion and considered the briefs and affidavits
submitted by the parties,
NOW, THEREFORE, IT
IS HEREBY ORDERED:
1. Defendants'
motion for costs, disbursements and actual attorney fees is denied.
2. This case is
dismissed with prejudice.
(Emphasis added.)
[3] Flynn began his action September 10, 1990,
and on October 9, 1990, Economy undertook defense of the action under a
reservation of rights. We affirmed the
trial court's order dismissing Flynn's remaining causes of action, and the
supreme court denied review August 24, 1994.
[4] Apparently after the Solners moved to change
venue to Dane County, Economy proposed to dismiss the coverage action without
prejudice instead. The Solners refused,
demanding that dismissal be with prejudice, or without prejudice but with
payment of attorney fees. Economy chose
to change venue to Dane County.
[5] The trial court also concluded that it could
not decide Economy's coverage defense--lack of notice--based on Solner's
deposition and that an evidentiary hearing would be needed to resolve the
merits of the defense.
[7] Section 802.05(1)(a), Stats., provides in relevant part that the signature of an
attorney on every pleading motion or paper constitutes a certificate that the
document is well grounded in fact and warranted by existing law or a good faith
extension of existing law and not filed for an improper purpose.