This appeal presents issues arising from an insurance company's refusal to unconditionally defend its insured and the insured's subsequent decision to settle the case.
Appellee Bayless and Roberts, Inc. (hereinafter B & R) was one of three defendants in a wrongful death action. B & R's defense in that action was undertaken by its liability insurance carrier, appellant Continental Insurance Company, pursuant to the terms of its insurance contract. As the case proceeded to trial Continental became convinced that B & R, through one of its officers, had breached its duty to cooperate in the defense of the case. As a result, Continental informed B & R that it would continue to defend only if B & R would agree to a reservation of Continental's right to later deny liability on the ground of the alleged breach. B & R refused to accept such a conditioned defense and, therefore, Continental withdrew from the case.
B & R settled the tort action, agreed to entry of a consent judgment for $618,000, and then sued Continental and its chief adjuster to recover the amount of the judgment as well as punitive damages. The case went to trial and resulted in an award of $622,000 in damages to B & R, based on the jury's finding that Continental and its adjuster, Arthur Stanford, had negligently conducted B & R's defense, and that the insurance company had breached its duty to defend its insured. Continental and Stanford then brought this appeal. We affirm the judgment of the superior court.
On May 22, 1970, Marvin Warbelow was fatally injured by the explosion of a paint pot which he was using to paint an aircraft. His widow subsequently filed an action for wrongful death and a survival action in the superior court, naming as defendants B & R, the owner of the paint pot; Decora, Inc., the manufacturer of the paint pot; and
Pursuant to the terms of its insurance contract,
The trial of the Warbelow matter began on November 27, 1972, in Fairbanks. In his opening statement to the jury, Gantz stated that Roberts had lent the paint pot to Warbelow. This statement of the facts, which was based on Roberts's affidavit, was in accord with the facts outlined in Gantz's pretrial memorandum. Since this description of Warbelow's acquisition of the paint pot, however, was inconsistent with Roberts's deposition, Decora, one of the other defendants in the case, moved under Civil Rule 37(d) for sanctions and a dismissal of the cross-claim filed against Decora by B & R. On December 9, Gantz wrote to Arthur Stanford, Continental's claims adjuster, indicating that Roberts's deposition presented a "real problem" and might be "very damaging." The letter also informed the insurance company that Decora had moved for sanctions and dismissal of the cross-claim and that Warbelow might file a similar motion.
As Gantz had predicted, Warbelow subsequently joined in Decora's motion for sanctions. On December 19, the trial court, proceeding under Civil Rule 37(d), dismissed B & R's cross-claim against Decora as a sanction for Roberts's "false swearing."
When Decora moved for sanctions and again when sanctions were imposed, Gantz explained to Roberts that it might be possible for Continental to raise a policy defense based on the judge's ruling. Gantz offered to withdraw from the representation of B & R because of his potential conflict of interest. The first time Gantz discussed this with Roberts, Roberts indicated he was satisfied with the representation. Following another discussion with Gantz early in January, however, B & R retained the firm of Ingraham and Niewohner in Fairbanks to represent its interests. Continental, in turn, retained the firm of Hagans, Smith and Brown.
By January 7, 1973, attorney Ingraham had learned of the current status of the case, including the fact that Decora and Sears had settled with Warbelow for $108,125 and $350,000 respectively, and that Warbelow had made a settlement offer to B & R of $160,000.
In compliance with that agreement, on February 8, 1973, B & R filed suit against Continental and Stanford. The complaint alleged that Continental's refusal to defend except under a reservation of rights constituted a breach of its fiduciary duty to B & R. It also alleged that Stanford breached his fiduciary duty in failing to adequately investigate the Warbelow claim and in failing to fully inform B & R, Continental, or Gantz of the facts of the case. Continental then counterclaimed, alleging that B & R had breached its obligation under the policy to cooperate in the defense of the claim.
The case was tried before a jury. At the end of the trial Stanford moved for a directed verdict on the issue of his liability, but the court denied that motion on the ground that Stanford did owe a fiduciary duty to B & R. Stanford appeals this decision. The court then granted B & R's motion for a directed verdict against Continental on the issue of B & R's alleged breach of the cooperation clause, instructing the jury that B & R had fulfilled its duty of cooperation. Continental appeals the granting of this motion.
The case then went to the jury on four issues: (1) Did Stanford, in his individual capacity as a claims adjuster, act negligently toward B & R? (2) Did Continental act in bad faith toward B & R? (3) Did Continental act negligently toward B & R? (4) Did Continental breach its duty to defend B & R?
The jury found that Stanford had acted negligently and that he was liable to B & R for $10,000. The jury found that, although Continental had not acted in bad faith, it had acted negligently and had breached its duty to defend B & R. In accordance with the court's instructions, the jury then awarded to B & R $618,000 in damages for Continental's negligence and $4,000 in damages for its failure to defend.
Continental subsequently moved for a reduction of the verdict by the amounts paid to Warbelow by Decora and Sears under their settlement agreements. The court denied that motion, and Continental appeals that decision. Both Continental and Stanford also moved for judgment notwithstanding the verdict or for a new trial, on
II. Liability of Insurance Adjuster Stanford
Arthur Stanford was the branch manager of Underwriters Adjusting Company in Anchorage. Underwriters Adjusting is a subsidiary of Continental Corporation and functions as the claims department of Continental Insurance Company, another subsidiary of Continental Corporation. Continental assigned the adjustment of the Warbelow claim against B & R to Stanford.
B & R's complaint in the instant case included the following allegation relevant to Stanford:
The evidence adduced at trial on this issue fell into two categories. First, plaintiffs introduced proof that, although Stanford knew of the inconsistency in Roberts's testimony on November 13, 1972, and was informed by Gantz on December 9, 1972, that the deposition presented a "real problem," he did not inform B & R of the conflict of interest and potential policy defense. Second, Stanford testified that, although prior to the Roberts deposition Continental had authorized him to settle the case for $10,000, he had never communicated this fact to Gantz nor had he ever offered that amount during the course of the case. At the close of the evidence, Stanford moved for a directed verdict on the issue of his liability to B & R, and the trial court denied the motion.
Stanford contends on appeal that he had no duty to B & R under his contract with Continental which would subject him to personal liability. He relies on two California cases which stand for the proposition that, since a claims adjuster is not a party to the contract of insurance, he is not bound by the implied covenant of good faith and fair dealing and thus owes no duty to comply with that covenant. Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 487, 510 P.2d 1032, 1039 (1973); Iverson v. Superior Court, 127 Cal.Rptr. 49, 51 (Cal. App. 1976).
In Iverson, the insured sued his insurance company's claims supervisor for failure to accept a settlement within policy limits. The Iverson court held that, although an unreasonable failure to settle would constitute a breach of the insurer's contractual duty of good faith and fair dealing, the claims supervisor owed no contractual duty of good faith to the insured. 127 Cal. Rptr. at 51. The Iverson court, however, specifically distinguished that situation from one in which an agent of the insurer committed a tort against the insured. The court held that the agent's liability would depend upon the plaintiff's theory of recovery:
Id. (citation omitted). Thus, under Iverson's reasoning, Stanford could not be held liable for a breach of the fiduciary duty of good faith arising out of the insurance contract, but he could be held liable for negligence arising out of a breach of the general tort duty of ordinary care.
This conclusion is consistent with our decision in Austin v. Fulton Insurance
III. B & R's Refusal to Accept a Conditional Defense
Continental contends that the trial court should have granted its motion for summary judgment on the ground that, as a matter of law, B & R breached the policy by refusing to accept Continental's offer to defend under a reservation of rights. Continental contends that it should be able to conduct the insured's defense without giving up its right to refuse to pay an adverse judgment if it can later establish that the insured breached a condition of the policy. B & R's position is that Continental cannot have it both ways. B & R contends that Continental must either (1) affirm the policy, defend the suit, and pay any resulting adverse judgment, thus waiving both the alleged breach by the insured and any possible coverage defenses, or (2) repudiate the policy and withdraw from the defense, taking its chances that its claim of a breach by the insured would stand up in a subsequent suit on the policy.
Continental acknowledges that the general rule is that, if an insured refuses to accede to the insurer's reservation of rights, the carrier must either accept liability under the policy and defend unconditionally or surrender control of the defense and be held liable if it guessed wrong on the coverage issue. See Boise Motor Car Co. v. St. Paul Mercury Indemnity Co., 62 Idaho 438, 112 P.2d 1011, 1016 (1941). Continental, however, urges us to reject that rule and adopt the approach of the Oregon Supreme Court in Ferguson v. Birmingham Fire Insurance Co., 254 Or. 496, 460 P.2d 342 (1969). Under Ferguson, where the insurer defends and there is a conflict of interest between the insurance company and the insured in the original litigation, a judgment in that action does not operate as an estoppel to prevent the insurance company from contesting coverage in a later action. The Ferguson court therefore found that it was unreasonable for the insured to insist that the insurance company either withdraw from the case or defend and waive its right to later litigate the question of coverage. Id. at 349.
Both Boise and Ferguson, however, are distinguishable from the case at bar. In Boise and Ferguson the insurance company refused to defend because it believed that the claim was not covered by the policy. In the case at bar, Continental is not contesting coverage in that sense. Continental's contention is that the policy is unenforceable because of the insured's breach of the cooperation clause.
Applying traditional principles of contract law, we perceive a substantial distinction between the two situations. In the
The purpose of the Boise rule — that an insured need not accept the insurance company's offer of a conditional defense under a reservation of rights — is to avoid conflicts of interest between the company and its insured. Two types of conflicts are foreseeable in the reservation of rights situation. The first conflict which may arise, if the insurer knows it can later assert non-coverage, is that it may offer only a token defense of its insured. If the insurer does not think that the loss on which it is defending will be covered under the policy, it may not be motivated to achieve the lowest possible settlement or in other ways treat the interests of its insured as its own. The second conflict arises when success on a particular theory of recovery in the case against the insured would result in the denial of coverage under the policy. In that case, the insurance company would have an interest in seeing the plaintiff obtain a verdict based on the theory under which no coverage would result. For example, if a plaintiff alleged both negligence and an intentional tort as alternative theories of recovery, an insurer operating under a reservation of rights might covertly frame its defense to achieve a verdict based upon commission of the intentional tort, so that it could later assert that the defendant was not covered, since the policy provided no coverage for intentional torts. In the absence of a reservation of rights agreement, however, the insurer would be liable for indemnification regardless of whether the verdict established negligence or an intentional
The court in Ferguson admitted that the overwhelming weight of authority holds that the two types of conflict described above justify not requiring an insured to accept a defense under a reservation of rights. 460 P.2d at 349. The Ferguson court, however, saw a way around each of the two types of conflict. In the first, more generalized conflict of interest situation, the court reasoned that the insurance company's knowledge of supposed jury sympathy toward an insured in a coverage dispute would prevent the insurer from providing a less than adequate defense on the merits:
Id. (footnote omitted).
As to the second form of conflict, where a judgment on one theory of the case could affect the coverage issue, the Ferguson court reasoned that, when such a conflict exists, the estoppel by judgment rule should not be applied to the trial on coverage. The court held that the judgment in the original action should operate as an estoppel in the subsequent coverage determination only when the interests of the insurer and insured in defending the original action were identical. Thus, under the Ferguson decision, if a plaintiff's alternative theories of recovery based on negligence and intentional tort posed a potential conflict of interest on the coverage issue, a finding by the jury that an intentional tort had been committed would not be binding in the later action to determine coverage:
Id. at 348-49 (footnotes omitted).
While the Ferguson approach might be acceptable in the coverage defense situation for which it was developed,
Because the application of the Ferguson approach to the policy defense situation would unacceptably compromise the interests of the insured, we reject it. The Boise approach requires the insurer to make a clear choice between defending and withdrawing, and, in the policy defense situation, we believe that approach is necessary to protect the interests of the insured. Thus, we decline to adopt in full the position of either party. It may be that, where the insurance company wishes to contest coverage, the insured is obligated to accept a defense under a reservation of rights.
In the case at bar, therefore, B & R was fully within its rights and did not breach of policy when it insisted that Continental either defend unconditionally or withdraw from the defense. The superior court properly denied Continental's motion for summary judgment.
IV. Breach of the Cooperation Clause
At trial Continental contended that its refusal to defend B & R without a reservation of rights was justified since Roberts, as an officer of B & R, had breached the contractual duty of the insured to cooperate in the defense by giving willfully false testimony at his deposition.
In De Hart v. Illinois Casualty Co., 116 F.2d 685 (7th Cir.1941), the United States Court of Appeals, Seventh Circuit, in a case involving a similar issue, said:
Id. at 687. "The failure of an insurer to inform the insured promptly of its intention to deny liability, upon discovering facts [amounting to] a breach of the co-operation clause by the insured, constitutes a waiver of the breach." State Farm Fire and Casualty Co. v. First National Bank, 2 Ill.App.3d 768, 277 N.E.2d 536, 540 (1972) (citations omitted). See also Ohio Casualty Insurance Co. v. Beckwith, 74 F.2d 75 (5th Cir.1935); Allstate Insurance Co. v. Keller, 17 Ill.App.2d 44, 149 N.E.2d 482 (1958); Dougherty v. Hanover Insurance Co., 114 N.J.Super. 483, 277 A.2d 242 (1971); Ziegler v. Ryan, 66 S.D. 491, 285 N.W. 875 (1939); Francis v. London Guaranty & Accident Co., 100 Vt. 425, 138 A. 780 (1927); Nationwide Mutual Insurance Co. v. Gentry, 202 Va. 338, 117 S.E.2d 76 (1960).
The alleged breach of the cooperation clause occurred on October 25, 1972, when Roberts's deposition was taken. Attorney Gantz was immediately aware of the conflict that had arisen in Roberts's testimony, and the possibility of a policy defense based on that conflict. Such knowledge on the part of Gantz, we believe, was imputed to his principal, Continental. By its failure to inform B & R of its intention to deny liability, until well after trial had begun, Continental waived this alleged breach of its cooperation clause as a matter of law.
We are also convinced that Continental's right to rely on the alleged breach was barred by principles of estoppel.
After a deposition has been transcribed, the witness deposed can make any change in the deposition he desires. "Any changes in form or substance which the witness desires to make shall be entered upon the deposition by the officer [before whom the deposition was taken] with a statement of the reasons given by the witness for making them." Rule 30(e), Alaska R.Civ.P. As previously noted, Gantz elected not to make any effort to have Roberts correct his deposition before proceeding to trial. This course of conduct not only jeopardized B & R's ability to defend against the claim of Warbelow, but also exposed B & R to the possibility of a policy defense being raised by Continental. Such conduct, we believe,
We therefore affirm the trial court's decision to grant B & R's motion for a directed verdict.
V. Liability Above Face Amount of Policy
The jury found that Continental had acted negligently, and it awarded B & R $618,000 in compensatory damages. Since the jury failed to find that Continental had acted in bad faith, Continental contends that the trial court erred in denying its motion for judgment notwithstanding the verdict or a new trial. Continental argues that its liability could not exceed policy limits: "The jury's finding that Continental `negligently defended its insured' cannot support an award of damages greater than the carrier's $100,000 obligation under the policy."
We reject Continental's argument and join those jurisdictions holding
7C J. Appleman, Insurance Law and Practice § 4687, at 1780 (Berdal ed. 1979) (footnotes omitted, emphasis added). See Crisci v. Security Insurance Co., 66 Cal.2d 425, 58 Cal.Rptr. 13, 17-18, 426 P.2d 173, 177-78 (1967); Rova Farms Resort, Inc. v. Investors Insurance Co. of America, 65 N.J. 474, 323 A.2d 495, 507-13 (1974).
Continental also contends that an insurance company may not be held liable over policy limits for the negligence of an attorney such as Gantz, arguing that one in his position is an independent contractor. Much of the testimony that was introduced at trial to establish the negligence of Continental actually related to the conduct of Gantz, the attorney retained by Continental to represent B & R.
Continental urges us to adopt the rule that an insurer cannot be held vicariously liable for the negligent conduct of an independent trial attorney whom the carrier has hired to conduct litigation. In Merritt v. Reserve Insurance Co., 34 Cal.App.3d 858, 110 Cal.Rptr. 511 (1973), the California Court of Appeal held that if an independent attorney, retained by an insurer to perform professional services, negligently conducts the defense of the insured, "the remedy for this negligence is found in an action against counsel for malpractice and not in a suit against counsel's employer to impose vicarious liability." Id. at 527. The Merritt court reasoned that the insurance company should not be held liable for the negligent acts of its independent contractor, especially since the duty to defend an insured is delegable. Under Alaska law, if Gantz is viewed as an independent contractor and not an agent, Continental could not necessarily be held liable for his negligence. See Morris v. City of Soldotna, 553 P.2d 474 (Alaska 1976).
We decline to follow Merritt in this case. Gantz was selected by Continental to carry out its contractual duty to defend B & R. While there is no suggestion that in doing so his motives and intent were anything but honorable, it is quite apparent that both Gantz and Continental believed that his first loyalty was to Continental, and that throughout the course of the litigation he acted for and on behalf of the insurance company. For example, on December 20, 1972, Gantz advised Stanford of the superior court's order imposing sanctions. In a letter to Stanford he stated:
Further indication of this overriding concern for the insurer can be discerned from the fact that it was Gantz who suggested to Stanford at that time that the company should sent a reservation of rights letter and Gantz who prepared a draft of the same for the company's consideration. Given these circumstances, we reject the holding in Merritt for the view expressed in Smoot v. State Farm Mutual Automobile Insurance Co., 299 F.2d 525 (5th Cir.1962): "The duty to defend is an important and frequently distinguishable part of the insurance contract. Those whom the Insurer selects to execute its promises, whether attorneys, physicians, no less than company-employed adjusters, are its agents for whom it has the customary legal liability." Id. at 530 (citations and footnote omitted).
Thus we conclude that the superior court properly denied Continental's motion for judgment notwithstanding the verdict or a new trial.
VI. Reduction of Judgment Because of the Sears and Decora Settlement
On January 10, 1973, B & R reached an agreement with Warbelow, and a consent judgment was entered for the amount of $618,000. Continental contends that a consent judgment has the same legal effect as a judgment on a verdict and that the consent judgment against B & R for $618,000 in the Warbelow action was subject to reduction by the amounts of the settlements negotiated by Sears and Decora. It argues that such a reduction is required by the Contribution Among Joint Tortfeasors Act, particularly AS 09.16.010 and 09.16.040.
We conclude that the statute does not require a reduction in the amount awarded under the consent judgment. Although the settlement reached by Warbelow and B & R was entered as a judgment, it was in essence a contract — a settlement agreement. It was certainly not an adjudication on the merits of the Warbelow claim. The nature of a consent judgment
Parkerson v. R-5, Inc., 305 So.2d 592, 595 (La. App. 1974). See generally Comment, Consent Judgments, 72 Harv.L.Rev. 1314, 1316 (1959).
If the judgment had been the result of a judicial determination of the merits of the case, it might have been subject to reduction under AS 09.16.040(1);
Having considered all allegations of error urged by Continental,
MATTHEWS, J., not participating.
BOOCHEVER, Chief Justice, dissenting in part.
I agree with the majority opinion except that I believe the amount of the the judgment should be reduced by the amounts previously paid as a result of settlements with Sears and Decora. B & R entered a confessed judgment for $618,000.00 on January 10, 1973. At that time Warbelow had previously negotiated settlements with Sears for $350,000.00 and with Decora for $108,125.00.
AS 09.16.010(d) specifies:
Thus, Sears and Decora could not recover contributions from B & R.
AS 09.16.040 provides:
According to this section, the amount of the judgment against B & R was to be reduced by the amounts stipulated for the release of Sears and Decora.
B & R does not contest Continental's assertion that a confessed judgment is subject to reduction under the statute. Instead, it characterizes the judgment as a negotiated settlement, which would not normally be subject to reduction by the amount of the other settlements achieved in the same action. B & R points to the fact that the figure was negotiated by the attorneys representing the parties, and states that there was no special reason why a judgment was needed. However, the "settlement" was reduced to judgment, and the figures indicate that it was the intent of B & R and Warbelow to treat the amount of $618.000.00 as the total liability of all three defendants.
Warbelow had made an offer of settlement to B & R on January 7, 1973, in the amount of $160,000.00, apparently based on the belief that this covered the limits of Continental's liability under its policy insuring B & R ($100,000.00 plus costs and attorney's fees). It seems obvious that the amount of the confessed judgment was to cover this sum plus the amount of the two prior settlements, rounded to the nearest thousand dollars.
Confessed Judgment $618,000 Total of Sears and Decora Settlements ($350,000 and $108,125) - 458,125 ________ $159,875
Thus, when the confessed judgment is reduced by the two settlements, the liability of B & R amounts to almost the identical sum as Warbelow's last settlement offer. The $618,000.00 represented the value of the Warbelow claim against all three defendants, and that amount due from B & R should be reduced by the amount of the Sears and Decora settlements.
In the suit nominally brought by B & R against Continental, the jury found Continental liable on a negligence theory. The jury had been instructed that B & R claimed $618,000.00 as damages resulting from that negligence. The jury was not instructed as to the prior settlements and that the amount of the B & R judgment was subject to reduction by the sum of $458,125.00. Warbelow was the real party in interest in the suit against Continental, and the trial court erred in failing to reduce the judgment as required by the Contribution Among Joint Tortfeasors Act (AS 09.16.010 and 09.16.040) by the amounts Warbelow was to receive under the other settlements. To hold otherwise results in a double recovery.
Luth v. Rogers & Babler Construction Co., 507 P.2d 761, 766 (Alaska 1973). In Luth, plaintiffs, injured in an automobile accident, entered into a covenant not to sue a potential defendant in consideration of payment of $3,500.00. Judgment was later obtained against Rogers & Babler in the amount of $7,000.00. The jury was not instructed as to the prior confession of judgment, similar to the situation here where the jury was not instructed as to the prior settlements. We held that the trial court employed the proper procedure in reducing the damages awarded by the amount of the prior settlement. Id.
Similarly, I believe that it was error not to reduce the amount of B & R's judgment by the amount of the Sears and Decora settlements.
Afcan, however, dealt only with the consequences of the failure to defend. 595 P.2d at 646-47. We have not been confronted with the question, and we do not decide, whether the insurer's defense of a claim under a duty to defend clause does estop it to contest coverage later. We note that whether estoppel is applied may depend on whether the interests of the insurer and the insured were adverse in the original action. See generally Comment, Estoppel, Third Party Practice, and Insurer's Defenses, 19 U.Chi.L.Rev. 546 (1952); Note, The Effect of Collateral Estoppel on the Assertion of Coverage Defenses, 69 Col.L.Rev. 1459, 1465-69 (1969). See also Browne, The Demise of the Declaratory Judgment Action as a Device for Testing the Insurer's Duty to Defend, 23 Clev.St.L.Rev. 423 (1974); Note, Liability Insurance Policy Defenses and the Duty to Defend, 68 Harv.L.Rev. 1436, 1443 n. 38 (1955) (in a few jurisdictions defense based on noncoverage not subject to estoppel principles).
AS 09.16.040 provides:
49 C.J.S. Judgments § 134 at 269 (1947) (footnotes omitted).
In a cross-appeal B & R has alleged that the superior court gave erroneous instructions on the issue of Continental's good faith and the award of punitive damages Because we affirm the judgment of the superior court in favor of B & R, it is unnecessary for us to consider the issue raised in the cross-appeal, since B & R urges us to do so only if the judgment is reversed.