United Fire & Cas. v. Shelly Funeral Home

• Decision Date: 03 April 2002
• Docket Number: No. 99-1399.,99-1399.
• Parties: UNITED FIRE & CASUALTY COMPANY, Appellee/Cross-Appellant, v. SHELLY FUNERAL HOME, INC. and Ted Shelly, Appellants/Cross-Appellees, Victor Schenke and Lila Schenke, Intervenors.
• Court: Iowa Supreme Court

642 N.W.2d 648

UNITED FIRE & CASUALTY COMPANY, Appellee/Cross-Appellant, v. SHELLY FUNERAL HOME, INC. and Ted Shelly, Appellants/Cross-Appellees, Victor Schenke and Lila Schenke, Intervenors.

No. 99-1399.

Supreme Court of Iowa.

April 3, 2002.

Rehearing Denied April 22, 2002.

David J. Dutton and Carolyn A. Rafferty of Dutton, Braun, Staack, & Hellman, P.L.C., Waterloo, for appellant Shelly Funeral Home, Inc.

Mark A. Roeder of Roeder & Hassler, Manchester, for appellant Ted Shelly.

Patrick M. Roby and Christopher L. Bruns of Elderkin & Pirnie, P.L.C., Cedar Rapids, for appellee.

Gerald T. Sullivan and William H. Roemerman of Crawford, Sullivan, Read & Roemerman, P.C., Cedar Rapids, for intervenors.

NEUMAN, Justice.

This declaratory judgment action involves coverage questions and a counterclaim for bad faith arising out of the defense of a tort action against a funeral home and its principal employee. The facts in the underlying tort action were bizarre, to say the least. In a nutshell, a jury found that the funeral director abused his access to an apartment owned by the funeral home and then emotionally injured its elderly tenants by repeatedly exposing himself and subjecting them to displays of pornography.

On this appeal, the funeral home contends the district court erred when it failed to enter a judgment against the insurer for alleged bad faith in the defense of the tort suit. The individual employee cites error in the court's failure to enter judgment for attorney fees he incurred for defending himself. The insurer claims on its cross-appeal that the court erred when it bound the insurer by the jury's finding of negligent supervision in the underlying case. The insurer also cross-appeals the court's interpretation of policy provisions pertaining to an "occurrence," claiming any emotional distress damages were the result of intentional, not accidental, conduct.

Because this declaratory judgment action was tried at law, our review is limited to the correction of legal error. Grinnell Mut. Reins. Co. v. Employers Mut. Cas. Co., 494 N.W.2d 690, 692 (Iowa 1993). The district court's well-supported factual findings are binding on us. Id. We are not, however, bound by the district court's legal conclusions. Pierce v. Farm Bureau Mut. Ins. Co., 548 N.W.2d 551, 553 (Iowa 1996). For the reasons that follow, we affirm in part, reverse in part and remand for entry of a judgment for attorney fees.

I. Background Facts and Proceedings.

Plaintiff, United Fire & Casualty Company (hereinafter United Fire), sold a comprehensive general liability policy to defendant, Shelly Funeral Home, Inc. This family-owned mortuary business has operated for three generations in Manchester, Iowa. Defendant Ted Shelly is the grandson of the company's founder. He became employed by the company in 1966 and, at the time of these proceedings, served as its president.

In addition to his duties as funeral director, Ted managed rental properties owned by the funeral home. As manager, Ted had keys allowing him access to the rental units. One of the funeral home's properties was rented for many years by an elderly couple, Victor and Lila Schenke. Ted's relationship with the Schenkes forms the backdrop for this suit over coverage under United Fire's policy.

In May 1997, the Schenkes sued Shelly Funeral Home, Inc., and Ted Shelly, personally, for damages brought about by Ted's sexual exploits in their apartment.¹ The Schenkes' suit rested on a number of theories including intentional infliction of emotional distress, assault, indecent exposure, harassment, trespass, landlord's failure to provide fit and habitable premises, landlord's abuse of access, and corporate liability for negligent hiring and supervision. They sought both compensatory and punitive damages. The defendants' answer and theory of defense rested on Ted Shelly's claim that his activities with the Schenkes were consensual in nature and unrelated to (and unknown by) his employer, Shelly Funeral Home, Inc. United Fire, disputing coverage, defended the lawsuit under a reservation of rights.

The case was tried to a jury. The jury plainly did not buy Ted's candid explanation of the sordid events, and it held the funeral home liable for his acts as well as finding it liable for negligent supervision. In accordance with the jury's verdicts for Lila, the court entered judgment against the funeral home and Ted, jointly and severally, for the sum of $122,500 in compensatory damages and, by way of punitive damages, $40,000 in Lila's favor against Ted. Joint and several liability was likewise entered in Victor's favor against both defendants in the sum of $97,500. Both defendants filed notice of appeal.

Shortly after the entry of these judgments, and while appeal was pending, United Fire brought this action to declare its duties and coverage obligations, if any, under the policy. Meanwhile it refused the defendants' demand to post a supersedeas bond to protect the funeral home from threatened execution by the Schenkes. Both Ted and the funeral home hired new counsel who filed a counterclaim for bad faith. Counsel also negotiated a settlement of the punitive damages award against Ted in the underlying suit and prevailed upon the Schenkes to delay execution on the remainder of their judgment until the coverage questions raised on this appeal could be resolved.

From a judgment declaring that (1) the funeral home's liability for negligent supervision was covered under the policy, (2) the insurer was not required to reimburse Ted for his attorney fees, and (3) the funeral home was not entitled to a judgment against the insurer for bad faith, all parties have appealed. Further facts will be detailed as they pertain to the issues before us.

II. Issues on Appeal.

Although the funeral home and Ted Shelly are the appellants, and their challenges pertain to the court's rejection of their claims of bad faith and failure to defend, we think it logical to begin with the coverage questions posed by United Fire's cross-appeal. In general, an insurer's objectively reasonable denial of coverage will preclude liability for bad faith. Morgan v. Am. Family Mut. Ins. Co., 534 N.W.2d 92, 96 (Iowa 1995), overruled on other grounds by Hamm v. Allied Mut. Ins. Co., 612 N.W.2d 775 (Iowa 2000)

. We turn, then, to the coverage questions.

A. Coverage. The policy issued by United Fire to the funeral home insures against perils described in two divisions, coverage A and coverage B.

Under coverage A, United Fire agrees to pay damages for which "the insured" becomes legally liable because of "bodily injury" caused by an "occurrence." The term "occurrence" is defined to mean "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." An exclusion under coverage A precludes coverage for bodily injury "expected or intended from the standpoint of the insured." The language of this exclusion incorporates the common definition of "accident." See Weber v. IMT Ins. Co., 462 N.W.2d 283, 287 (Iowa 1990)

(defining "accident" as "an unexpected and unintended event").

Under coverage B, United Fire agrees to pay sums the insured becomes legally obligated to pay because of "personal injury" caused by an offense arising out of the insured's business. In this context, "[p]ersonal injury" expressly includes an injury "arising out of ... wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of [leased premises]." Coverage B, however, does not apply to personal injury "[a]rising out of the willful violation of a penal statute or ordinance committed by or with the consent of the insured."

Under a section of the policy captioned "WHO IS AN INSURED," the policy lists a corporation (such as the funeral home) as well as its "executive officers" and directors "but only with respect to their duties as [the company's] officers or directors." The policy affords similar coverage to employees, who are recognized as having "insured" status "but only for acts within the scope of their employment ... or while performing duties related to the conduct of [the named insured's] business."

The district court found, and there is no dispute on appeal, that the jury's verdicts against Ted Shelly for intentional infliction of emotional distress and indecent exposure were "clearly based on intentional conduct and not on an `occurrence' as defined in the policy." Thus the policy afforded him no coverage, as a director and employee of the corporation, for damages arising from his sexual conduct with the Schenkes. It also appears undisputed that under coverage B, the policy insured against personal injury damages awarded on the basis of landlord's abuse of access, a provision not requiring proof of an "occurrence." Thus the record reveals that statutory damages of $5000, assessed jointly and severally against Ted and the funeral home, have been paid by United Fire.

The question is whether United Fire's policy covers the jury's compensatory damages verdict against the funeral home based on its negligent supervision of Ted Shelly. United Fire claims it does not, arguing any emotional distress damages suffered by the Schenkes resulted from Ted's intentional conduct, not an accidental "occurrence." The funeral home and the Schenkes, as intervenors, counter that the nature of the claim must be examined and the coverage determined from the perspective of the insured. As to this verdict, they argue, damages arose from alleged negligent supervision by the funeral home, not Ted's incidental (albeit intentional) conduct. And, the argument continues, any damages attributable to the funeral home on this legal theory were accidental, that is, unexpected and unintended, from its perspective as a named insured.

United Fire insists that its policy affords coverage based on the cause of the bodily injury, not on the type of claim asserted by the plaintiff. Thus it asserts ...