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NOTICE This opinion is
subject to further editing and modification.
The final version will appear in the bound volume of the official
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No. 94-1743
STATE OF WISCONSIN
: IN SUPREME COURT
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Towne Realty, Inc., Joseph Zilber, Donald Grande and Gerald Stein, Plaintiffs-Respondents, v. Zurich Insurance Company, Defendant-Appellant-Petitioner. |
FILED MAY 22, 1996 Marilyn L. Graves Clerk
of Supreme Court Madison,
WI |
REVIEW of a decision of the Court of
Appeals. Affirmed in part and
reversed in part.
DONALD W. STEINMETZ,
J. This case presents the following three issues concerning the
breach of an insurer's duty to defend and the resulting damages from such a
breach: (1) what constitutes a
"tender of defense" under an insurance contract; (2) whether legal
defense expenses incurred before the tender are allowable as damages;
and (3) when, if ever, is an insurer responsible for the legal expenses
involved in pursuing a countersuit. We
hold that a tender of defense occurs
when the insurer has notice that there is a claim against the insured. Further, we hold that even if an insurer
does breach its duty to defend, the insurer cannot be held liable for either
those expenses incurred by the insured before the insurer has been put on
notice or those incurred by the insured in prosecuting a countersuit, unless,
of course, the contract so provides.
Towne Realty, Inc., Joseph Zilber, Donald Grande and Gerald Stein
(collectively the "Insureds") filed this action claiming that Zurich
Insurance Company ("Zurich") breached its duty to defend the Insureds
against a suit brought by Joseph and Leslie West Balestrieri. The Balestrieris sued the Insureds on
October 11, 1991, for damages resulting from various alleged wrongdoings
including breach of contract, tortious interference with contract, negligent
and intentional misrepresentation and breaches of fiduciary duty. On October 21, 1991, an agent of Towne
Realty sent a letter to Zurich advising Zurich of the suit. The pertinent portions of this letter read:
At
this time, the enclosed information is not being submitted as a claim. I am sending it to your attention for review
and discussion.
As
it is an unusual and complicated situation, we would first like to see Zurich's
insight into potential position on extent of coverage.
. . .
At
present, we have retained the services of Attorney Michael Wherry with the firm
Davis and Kuelthau in Milwaukee, WI and would like to continue his services as
he is well acquainted with the intricacies of this matter.
A copy of the summons and complaint was also attached to this letter
filed by the Balestrieris. Zurich's
only response to this letter was an acknowledgement of its receipt and creation
of a claim file on October 24, 1991.
Zurich did not respond to Towne Realty's query regarding coverage until
May 18, 1992, when it sent a letter denying coverage and refusing to defend
against the action.
Although some correspondence
continued between the Insureds and Zurich, this denial of coverage ultimately
led to the Insureds seeking summary judgment in a declaratory judgment action
filed against Zurich on May 6, 1993, in Milwaukee County. The trial court, Honorable Patricia S.
Curley, determined that the policy covered the types of actions alleged by the
Balestrieris and granted summary judgment in the Insureds' favor. During subsequent hearings, Judge Curley
also held that the October 21, 1991, letter constituted a proper tender of
defense and that the expenses incurred by the Insureds before October 21, 1991,
and those expenses associated with the Insureds' pursuit of various
counterclaims against the Balestrieris were recoverable as damages flowing from
Zurich's breach of its duty to defend.
The court of appeals affirmed the circuit court on all three issues,
with Presiding Judge Thomas Cane dissenting on the issues of recovery of
pre-tender and countersuit expenses. See
Towne Realty, Inc. v. Zurich Ins. Co., 193 Wis. 2d 544, 534 N.W.2d
886 (Ct. App. 1995). In order to fully understand the questions
presented by this case, it is necessary to further discuss the underlying
Balestrieri action. The Insureds
incurred significant legal expenses in the 11 days after the Balestrieri suit
was initiated, but before they first contacted Zurich. The Insureds claim that because of the high
level of publicity garnered by the suit, these expenses, which included
strategizing on media control and preparing for injunctive relief to protect
crucial documents in control of the Balestrieris, were a necessity. They were allegedly facing an
"emergency" situation which required immediate legal attention.
After receiving no response
from Zurich other than the October 24, 1991, acknowledgement of receipt, the
Insureds continued to defend against the Balestrieri action. In November or December of 1991, the
Insureds individually filed responsive pleadings, which included a number of
counterclaims, to the Balestrieri suit.
Then, after various hearings and motions, the Balestrieri suit was
dismissed without prejudice on January 21, 1992. The Insureds, however, continued to pursue their counterclaims
until June 4, 1993. The damages sought
by the Insureds, therefore, can be broken into three "sets": (1) those expenses incurred prior to
notifying Zurich of the suit; (2) those expenses incurred "defending"
the Balestrieri suit; and finally (3) those expenses incurred in pursuing
counterclaims against the Balestrieris.
Of the three issues presented
by this case, the first and foremost is whether the Insureds ever effectuated a
tender of defense. Obviously, if a
tender of defense had not been made, or, as argued by Zurich in the
alternative, the Insureds in Towne Realty's October 21, 1991, letter
specifically requested Zurich not to take part in the defense of the
Balestrieri suit, then Zurich would not be liable for any damages. It is only if the October 21, 1991, letter
constituted a tender of defense that the remaining two issues must be
addressed.
As the court of appeals
recognized, the sufficiency of a tender of defense is a question of first
impression in the State of Wisconsin. See
Towne Realty, 193 Wis. 2d at 557.
Since it entails the application of a set of undisputed facts to a legal
standard, it is a question of law which we answer without deference to the
trial court or the court of appeals. See
Nottelson v. ILHR Department, 94 Wis. 2d 106, 116, 287 N.W.2d 763
(1980).
The court of appeals identified a split in those authorities which
have considered the sufficiency of a tender of defense under an insurance
contract. See Towne Realty
193 Wis. 2d at 558. Several courts
have held that an insurer only needs to be put on notice for the duty to defend
to be invoked. See White
Mountain Constr. v. Transamerica Ins., 631 A.2d 907, 910 (N.H. 1993); Widener
Univ. v. F.S. James & Co., 537 A.2d 829, 833 (Pa. Super. Ct. 1988); Cobb
v. Empire Fire & Marine Ins. Co., 488 So. 2d 349, 350 (La. Ct. App.
1986). Other courts require the insurer
to specifically request the insurance company to defend the suit. See, e.g., Hartford Acc.
& Indem. Co. v. Gulf Ins. Co., 776 F.2d 1380, 1383 (7th Cir. 1985); Casualty
Indem. Exchange Ins. Co. v. Liberty Nat'l Fire Ins. Co., 902 F. Supp. 1235,
1239 (D. Mont. 1995); Litton Systems, Inc. v. Shaw's Sales & Serv., Ltd.,
579 P.2d 48, 52 (Ariz. Ct. App. 1978).
The court of appeals found the first position more persuasive. See Towne Realty, 193
Wis. 2d at 558.
We agree with both the
conclusion and the analysis of the court of appeals. A tender of defense occurs once an insurer has been put on notice
of a claim against the insured. This
approach "discourages the insurer . . .
from defaulting in the performance of its duty to defend." White Mountain, 631 A.2d at 910. Furthermore, placing the duty upon the
insurer is not as onerous as placing the duty upon the insured: insurers are usually more sophisticated and
knowledgeable than insureds regarding the insurer's duty to defend and insurers
are in a better position than insureds to facilitate clear communication between
the parties.
There is no doubt that Zurich
had notice that a suit had been initiated against the Insureds. The Insureds attached a copy of the summons
and complaint to their October 21, 1991, letter. Zurich, therefore, was not only aware of the suit as of this
date, but was also aware of the specific claims alleged against the
Insureds. As was its right, Zurich
denied coverage based upon a reasonable belief that the claims contained in the
complaint were not covered by the insurance policy. However, since the circuit court subsequently determined that the
claims were covered by the policy and that Zurich had improperly denied
coverage, Zurich is liable for all damages flowing from its breach of its duty
to defend as of October 21, 1991, the date it was put on notice of the suit.
Zurich, however, argues, in
the alternative, that even if the October 21, 1991, letter qualifies as an
adequate tender of defense, the language of the letter waives Zurich's duty to
defend by explicitly stating that the suit was not being submitted as a
claim. Although Zurich argues this
position vehemently, it is not persuasive under the facts of this case. The language of the October 21, 1991, letter
is not nearly as clear or as explicit as Zurich claims. Instead, the letter is at best ambiguous and
can easily be read, as the court of appeals noted, to support the Insureds'
position that the letter was "a request that Zurich assume defense of the
action." Towne Realty, 193
Wis. 2d at 559. This court has repeatedly held that
"[i]f there is any doubt about the duty to defend, it must be resolved in
favor of the insured." Shorewood
School Dist. v. Wausau Ins., 170 Wis. 2d 347, 364, 488 N.W.2d 82 (1992); see
also, e.g., Elliott, 169 Wis. 2d at 321. Although these holdings specifically apply
to the question of whether coverage exists under a contract, underlying these
decisions is the general realization that the insurer is in a superior position
to the insured in relation to the formation and interpretation of the insurance
contract. Therefore, we hold that if it
is unclear or ambiguous whether the insured wishes the insurer to defend the
suit, it becomes the responsibility of the insurer to communicate with the
insured before the insurer unilaterally forgoes the defense.[1] This places the "burden of ensuring
clear communication between the insurer and insured on the insurer, who is
better positioned, in terms of expertise and resources, to manage such a
task." White Mountain Const.,
631 A.2d at 910. Despite Zurich's
protestations, this holding should not create an onerous duty for
insurers: a simple letter requesting
clarification of the insured's position should suffice.[2]
In this case, however, Zurich
did not even attempt to determine if the Insureds' wished Zurich to take over
the defense or if they simply sought Zurich's position on coverage. Instead, Zurich ignored the Insureds'
multiple attempts to communicate with it and waited months before it even
responded with a position on coverage.
In fact, it wasn't until February 11, 1994, that Zurich gave any
indication that it did not consider the October 21, 1991, letter an adequate
tender. When faced with an ambiguous
communication from an insured, such as the October 21, 1991, letter, an insurer
cannot engage in this type of behavior and simply "assume" that the
insured does not wish a defense.
Instead, it has an affirmative duty to specifically determine that a
defense is not desired. Zurich did
nothing to meet this duty.
Zurich, therefore, is liable
for any expenses incurred by the Insureds in defending against the Balestrieri
suit from the date Zurich had notice of the claim, October 21, 1991, until the
date the Balestrieri suit was dismissed, January 21, 1992. Two questions, however, remain: (1) is Zurich liable for the Insureds'
expenses incurred between October 11, 1991, and October 21, 1991, the so-called
"pre-tender" expenses, and (2) is Zurich liable for the expenses
associated with the Insureds' pursuit of various counterclaims against the
Balestrieris. Since the proper measure
of damages for an insurer's breach of its duty to defend is a question of law,
we review both questions de novo without deference to the trial court or the court
of appeals. See Newhouse v.
Citizens Security Mut. Ins., 176 Wis. 2d 824, 837, 501 N.W.2d 1
(1993).
The court of appeals held
that Zurich is liable for all pre-tender expenses. See Towne Realty, 193 Wis. 2d at 561. We disagree. Zurich can only be liable for damages which "naturally flow"
from its breach of a contractual duty.
Newhouse, 176 Wis. 2d at 837.
Zurich had no duty to defend until it had been put on notice that there
was a claim against the Insureds. As
the Minnesota Supreme Court recognized in a similar situation, a tender of
defense is a condition precedent to the creation of a duty to defend. See SCSC Corp. v. Allied Mut. Ins.
Co., 533 N.W.2d 603, 614 (Minn. 1995).
Since Zurich's duty to defend did not attach until October 21, 1991, any
expenses which the Insureds incurred before this time, unless specifically
allowed by the contract,[3]
cannot flow from Zurich's breach of this duty.
To hold otherwise would require Zurich to have breached a contractual
duty on October 10, 1991, that did not even exist until October 21, 1991.
This court reached a similar
conclusion in Pitrowski v. Taylor, 55 Wis. 2d 615, 201 N.W.2d 52
(1972). In Pitrowski we held
that an insurer was not liable for certain attorney fees since prior to
incurring such fees the insured neither made a tender of defense nor requested
authorization from the insurer for such expenses. See id. at 626.
Zurich, like the insurer in Pitrowski, did not have a duty to
defend at the time the expenses in question were incurred because no tender of
defense had been made. The fact that
Zurich did eventually breach its duty and the insurer in Pitrowski
did not is a distinction without a difference in relation to the issue
of pre-tender expenses.
The final question before
this court is whether Zurich is liable for the expenses incurred by the
Insureds in prosecuting the counterclaims against the Balestrieris. In Newhouse we held that damages
which naturally flow from a breach of a duty to defend include: "(1) the amount of the judgment or
settlement against the insured plus interest; (2) costs and attorney fees
incurred by the insured in defending the suit; and (3) any
additional costs that the insured can show naturally resulted from the
breach." Newhouse, 176 Wis.
2d at 838 (emphasis added). Only legal
expenses incurred while "defending the suit" against the insured are
recoverable.
Although Newhouse does
not specifically define what constitutes "defending the suit," it is
clear that countersuits are not included under the language of the insurance
contract in this case. According to the
contract, Zurich only has a duty to defend "any suit seeking . . .
damages" against the Insureds. This
court interpreted insurance contract language almost identical to this to mean
exactly what it says: "the only
duty imposed on the insurer[] is to defend against suits seeking damages from
the insureds." City of Edgerton v. General Cas. Co., 184
Wis. 2d 750, 765, 517 N.W.2d 463 (1994), cert. denied, 115 S.Ct.
1360 (1995). This language clearly
precludes recovery of expenses for offensive actions taken by the insured. At risk of stating the obvious, a
countersuit initiated by the insured cannot logically be a suit seeking
damages from the insured.
The Insureds assert, though,
that an exception should be made in situations such as this where the
prosecution of a counterclaim is necessary to fully defend the original
suit. They argue that it was the
vigorous advancement of the countersuit which was ultimately responsible for
the quick dismissal of the Balestrieri action.
However, as Judge Cane perceptively observed in his dissent, although
"[i]t may be true that a good defense is a good offense, . . . that does
not create an obligation beyond the terms of the insurance policy . . .
." Towne Realty, 193
Wis. 2d at 569-70. The insurance contract simply does not
establish an obligation on the part of Zurich to indemnify the Insureds for the
pursuit of counterclaims. If Zurich had
been performing the defense of the suit, the Insureds certainly could not have required
Zurich to pursue a counterclaim. The
same reasoning is applicable when determining Zurich's liability due to its
breach of contract. It is a basic
tenent of contract law that a party is not entitled to greater damages than
what he or she would have received under the contract if the defaulting party
would have fully performed.[4] By
the Court.—The decision of the court of appeals is affirmed in part and
reversed in part.
SHIRLEY S. ABRAHAMSON, J.,
did not participate.
SUPREME
COURT OF WISCONSIN
Case No.: 94-1743
Complete Title
of Case: Towne Realty, Inc., Joseph Zilber,
Donald Grande and Gerald Stein,
Plaintiffs-Respondents,
v.
Zurich Insurance Company,
Defendant-Appellant-Petitioner.
____________________________________
REVIEW OF A DECISION OF THE COURT OF APPEALS
Reported at: 193
Wis. 2d 544, 534 N.W.2d 887
(Ct. App. 1995)
PUBLISHED
Opinion Filed: May 22, 1996
Submitted on Briefs:
Oral Argument: April
2, 1996
Source of APPEAL
COURT: Circuit
COUNTY: Milwaukee
JUDGE: PATRICIA S. CURLEY
JUSTICES:
Concurred:
Dissented:
Not Participating: ABRAHAMSON, J., did not
participate
ATTORNEYS: For the defendant-appellant-petitioner
there were briefs by Robert Marc Chemers, Scott L. Howie and Pretzel
& Stouffer, Chartered, Chicago, IL and Paul J. Pytlik and Otjen,
Van Ert, Stangle, Lieb & Weir, S.C., Milwaukee and oral argument by Scott
L. Howie.
For the
plaintiffs-respondents there was a brief by James E. Culhane, Michael R.
Wherry and Davis & Kuelthau, S.C., Milwaukee and oral argument
by Michael R. Wheery.
Amicus
curiae was filed by Susan R. Tyndall and Hinshaw & Culbertson,
Milwaukee for the Civil Trial Counsel of Wisconsin and Wisconsin Insurance
Alliance.
[1] There would not, of course, be a duty on the part of the insurer to contact the insured if correspondence from the insured explicitly stated that it was waiving its contractual right to a defense. The October 21, 1991, letter, however, hardly constitutes a waiver.
[2] The insurer fulfills its duty once it requests the insured for clarification of its position. If the insured is uncooperative or unresponsive, the insurer need not pursue the matter further. This will prevent a sophisticated insured from intentionally vacillating on whether it wants the insurance company to defend the action and, then, after significant legal expenses have accumulated, demanding indemnification.