915 P.2d 1285 (Colo. 1996), 94SC376, Bernhard v. Farmers Ins. Exchange

Docket Nº:94SC376.
Citation:915 P.2d 1285
Opinion Judge:Justice KOURLIS Justice.
Party Name:Sandra O. BERNHARD, Petitioner, v. FARMERS INSURANCE EXCHANGE, Respondent.
Attorney:The Law Firm of Kevin S. Hannon, Kevin S. Hannon, Denver, for Petitioner., Hall & Evans, P.C., Malcolm S. Mead, Eugene O. Daniels, Denver, for Respondent. Hall & Evans, P.C., Malcolm S. Mead, Eugene O. Daniels, Denver, for Respondent.
Judge Panel:LOHR, J., dissents.
Case Date:April 22, 1996
Court:Supreme Court of Colorado
 
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Page 1285

915 P.2d 1285 (Colo. 1996)

Sandra O. BERNHARD, Petitioner,

v.

FARMERS INSURANCE EXCHANGE, Respondent.

No. 94SC376.

Supreme Court of Colorado, En Banc

April 22, 1996

Rehearing Denied May 20, 1996.

Page 1286

The Law Firm of Kevin S. Hannon, Kevin S. Hannon, Denver, for Petitioner.

Hall & Evans, P.C., Malcolm S. Mead, Eugene O. Daniels, Denver, for Respondent.

OPINION

Justice KOURLIS Justice.

We granted certiorari to review the court of appeals opinion in Bernhard v. Farmers Insurance Exchange, 885 P.2d 265 (Colo.App.1994), which set aside an award of attorney fees incurred in an action by an insured against her insurer for bad faith breach of insurance contract. We recognize no exception to the American rule on attorney fees that would allow an award of attorney fees in a bad faith breach of insurance contract action and accordingly affirm the judgment of the court of appeals.

I.

This is an action by the insured, Sandra Bernhard, against her automobile liability insurer, Farmers Insurance Exchange ("Farmers"), for bad faith breach of insurance contract. Bernhard's automobile insurance policy provided bodily injury liability protection in the amount of $100,000 per person and $300,000 per accident. The policy also gave Farmers "the right and duty to defend, at its own expense, any suit against the insured seeking damages on account of such bodily injury or property damage...." The policy further read: "The Company may make such investigation and settlement of any claim or suit as it deems expedient, but shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of liability has been exhausted by payment or judgments or settlements."

On December 5, 1986, Bernhard drove through a stop sign and struck a car, seriously injuring the two occupants, John and Lucille Olivas. Bernhard, who had consumed several alcoholic drinks before driving home from her job as a waitress at the Flatirons Country Club, was found to be legally intoxicated at the time of the accident. The Olivases sued Bernhard and the Flatirons Country Club for compensatory and exemplary damages in excess of Bernhard's $100,000 per person policy limits. As required by the terms of the contract, Farmers provided an attorney to defend Bernhard. 1

On two separate occasions the Olivases made time-limited offers to settle their claims against Bernhard: first for the applicable policy limits of $200,000 and later, for $230,000. Farmers did not accept either of these settlement offers. At trial, the jury found against Bernhard and the Flatirons Country Club and awarded the Olivases damages substantially in excess of the policy limits. John and Lucille Olivas were awarded $407,000 and $163,000 in compensatory damages, respectively, and $5,000 each in exemplary damages. After the Flatirons Country Club paid the amount for which it was liable and Farmers paid the Olivases the $200,000 it owed on Bernhard's policy, $82,000 remained owing on the judgment against Bernhard.

Bernhard then entered into an agreement with the Olivases in which Bernhard agreed to pursue a bad faith claim against Farmers seeking the amount of excess judgment as damages. Under this agreement, the Olivases would receive the first $82,000 of any recovery and anything above that would go to Bernhard. As long as Bernhard went through all available appeals and exhausted all her remedies, the Olivases agreed not to

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execute on the $82,000 excess judgment owed to them by Bernhard.

Bernhard brought this suit for bad faith breach of contract against Farmers for its failure to settle with the Olivases. She sought a damage award for the excess judgment of $82,000 and additional damages for emotional distress. The case initially resulted in a hung jury but was retried in July of 1992. The jury did not award Bernhard any damages for emotional distress, but did award her $108,911.30 for the excess judgment and for the attorney fees she had incurred in bringing the bad faith breach of contract case against Farmers.

Farmers moved for a new trial or to amend the judgment, arguing that the jury could not award attorney fees. Bernhard agreed that the jury's verdict should not have included attorney fees, but filed a separate motion seeking an award of attorney fees from the court. At the hearing, the trial court judge awarded Bernhard $32,000 for attorney fees incurred in the pursuit of her bad faith claim against Farmers. Farmers appealed and the court of appeals reversed the trial court's award of attorney fees.

We granted certiorari to determine:

Whether the court of appeals erred by reversing the trial court's award of attorney fees upon the petitioner's successful litigation of a tortious breach of insurance contract claim.

We hold that, unless specifically provided for in the insurance contract, attorney fees are not recoverable upon successful litigation of a bad faith breach of insurance contract claim. We therefore affirm the court of appeals' reversal of the trial court's award of attorney fees to Bernhard and remand the case for proceedings consistent with this opinion.

II.

As a general rule, in the absence of a statute, court rule, 2 or private contract to the contrary, attorney fees are not recoverable by the prevailing party in either a contract or tort action. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247, 95 S.Ct. 1612, 1616, 44 L.Ed.2d 141 (1975); Bunnett v. Smallwood, 793 P.2d 157, 160 (Colo.1990). This reasoning is based on the American rule, which requires each party in a lawsuit to bear its own legal expenses.

The rationale behind the rule is broad-ranging: for example, responsibility for one's own legal expenses is thought to promote settlement; poor litigants may be discouraged from instituting actions to vindicate their rights if the penalty for losing were to include paying their opponent's attorney fees; and the difficulty of ascertaining reasonable attorney fees in every case would pose a substantial burden on judicial administration. See Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 718, 87 S.Ct. 1404, 1407, 18 L.Ed.2d 475 (1967).

Colorado does recognize several exceptions to the general rule, 3 however, Bernhard's

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claim for attorney fees does not fit within any established exception. Permitting Bernhard to recover attorney fees would represent the creation of a new exception to the American rule: a function better addressed by the legislative than the judicial branch of government.

Bernhard argues that her situation is analogous to that discussed in Farmers Group, Inc. v. Trimble, 658 P.2d 1370 (Colo.App.1982) (Trimble I ), Farmers Group, Inc. v. Trimble, 691 P.2d 1138 (Colo.1984) (Trimble II ), and Farmers Group, Inc. v. Trimble, 768 P.2d 1243 (Colo.App.1988) (Trimble III ), and that since attorney fees were awarded in that line of cases, they should be awarded in her case as well. Bernhard, however, misapplies the Trimble cases.

The Trimble cases were related to a third party personal injury lawsuit brought against the insured, Trimble, based on several claims including one of negligent entrustment. Trimble's insurer, Farmers Group, Inc., was contractually required to provide for Trimble's legal defense. Farmers Group, Inc., did hire an attorney to defend Trimble. However, while this third party case was ongoing, Farmers Group, Inc., filed a declaratory judgment action against Trimble seeking a determination that Trimble's policy did not provide coverage for the negligent entrustment claim. As a result, Trimble was unable to discuss the third party proceedings with the attorney retained by Farmers Group, Inc., and because he was facing an imminent deposition in the third party suit, he was forced to retain a private attorney to defend himself. The third party claim against Trimble eventually settled out of court. In the meantime, Trimble counterclaimed against the insurer in the declaratory judgment proceeding, seeking reimbursement of the money he had spent on hiring the private attorney.

The court of appeals in Trimble I held that Trimble could recover his costs in hiring an attorney to defend him against the claims brought by the third party. The court reasoned that the fees were recoverable since they were incurred as a direct result of the insurer's failure to provide him with a legal defense, which was an explicit term of the contract. The court stated that the fees could be "considered damages naturally flowing from the failure of the insurer to exercise reasonable care in representing the insured in the course of litigation." Trimble I, 658 P.2d at 1374.

This court explained in Bunnett v. Smallwood, 793 P.2d 157, 161 (Colo.1990), that attorney fees are recoverable when they themselves are the subject of the lawsuit, or in other words, when the fees represent a specific benefit of the contract breached by the opposing party. For example, when an attorney brings suit against his or her own client to enforce a fee agreement, the past due attorney fees sought by the attorney are themselves the subject of the lawsuit. In such a situation the fees are not merely incidental to the bringing of the lawsuit but rather are an explicit benefit of the contract breached by the opposing party. Similarly, in Trimble I, Trimble sought reimbursement for the fees that he was forced to incur due to the insurer's failure to provide counsel. These fees were a specific and direct benefit of the contract breached by the insurer. Thus, they were not incidental to the bringing of the lawsuit but rather were the subject of the action itself.

While the facts show that the award of attorney fees in the Trimble cases fits within an exception to the American rule accepted in Colorado...

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