Attorneys Liab. Prot. Soc'y, Inc. v. Ingaldson Fitzgerald, P.C.

• Citation: 370 P.3d 1101
• Decision Date: 25 March 2016
• Docket Number: No. S–15683.,S–15683.
• Court: Supreme Court of Alaska (US)
• Parties: ATTORNEYS LIABILITY PROTECTION SOCIETY, INC., a Risk Retention Group, Plaintiff, Cross–Appellant/Appellee, v. INGALDSON FITZGERALD, P.C., f/k/a Ingaldson, Maassen & Fitzgerald, P.C., Defendant, Appellee/Cross–Appellant.

370 P.3d 1101

ATTORNEYS LIABILITY PROTECTION SOCIETY, INC., a Risk Retention Group, Plaintiff, Cross–Appellant/Appellee,

v.INGALDSON FITZGERALD, P.C., f/k/a Ingaldson, Maassen & Fitzgerald, P.C., Defendant, Appellee/Cross–Appellant.

No. S–15683.

Supreme Court of Alaska.

March 25, 2016.

Kendra E. Bowman and Scott J. Gerlach, Delaney Wiles, Inc., Anchorage, and Kevin D. Hartzell and Angela Probasco, Kutak Rock LLP, Omaha, Nebraska, for Plaintiff—Cross–Appellant/Appellee.

William H. Ingaldson and Jim M. Boardman, Ingaldson Fitzgerald, P.C., Anchorage, for Defendant—Appellee/Cross–Appellant.

Daniel Wilkerson, Assistant Attorney General, Anchorage, and Craig W. Richards, Attorney General, Juneau, for Amicus Curiae State of Alaska.

Before: STOWERS, Chief Justice, FABE and BOLGER, Justices, and MATTHEWS and EASTAUGH, Senior Justices.^*

OPINION

FABE

, Justice.

I. INTRODUCTION

Today we resolve two questions certified to us by the United States Court of Appeals for the Ninth Circuit:

1. Does Alaska law prohibit enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) the claims are later determined to be excluded from coverage under the policy?

2. If the answer to Question 1 is "Yes," does Alaska law prohibit enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) it is later determined that the duty to defend never arose under the policy because there was no possibility of coverage? ^[1]

The answer to both questions is "yes."

II. FACTS AND PROCEEDINGS

The facts of this case are not in dispute for the purpose of resolving the certified questions.² Ingaldson Fitzgerald is an Alaska law firm. Attorneys Liability Protection Society, Inc. (ALPS) is a Montana insurance company and risk-retention group. From April 29, 2007, to April 29, 2008, ALPS insured Ingaldson Fitzgerald.

Ingaldson Fitzgerald's insurance policy with ALPS insured the firm against claims arising from "an act, error or omission in professional services that were or should have been rendered by [Ingaldson Fitzgerald]." The policy expressly excluded from coverage any claims arising from conversion or disputes over fees. The policy also contained a provision providing that Ingaldson Fitzgerald would reimburse ALPS for fees and costs ALPS incurred in defending non-covered claims.

In 2008 the bankruptcy trustee for the bankrupt estate of a former client of Ingaldson Fitzgerald, in conjunction with a separate former client of the firm, brought a claim against the firm in the U.S. Bankruptcy Court for the District of Alaska. The suit concerned Ingaldson Fitzgerald's actions in disbursing from and withdrawing fees and costs against a retainer. The former client and the trustee sought recovery of that retainer,³ and asserted claims against Ingaldson Fitzgerald for, among other things, restitution, disgorgement, and conversion.⁴

Ingaldson Fitzgerald notified ALPS of the underlying suit. ALPS responded by accepting Ingaldson Fitzgerald's tender of the defense in the underlying suit, but with the caveat that ALPS "reserved ‘all rights.’ "⁵ In its reservation of rights letter, ALPS explained that the underlying suit made allegations of activities that "d[id] not appear to implicate the provision of services or activities by [Ingaldson Fitzgerald] as an attorney in an attorney-client relationship," and thus "d[id] not appear to be professional services within the Policy's coverage." The letter also asserted that the claims in the underlying suit sought restitution that was not within the policy's definition of covered "damages" and that the policy did not cover claims related to disputes over fees, dishonest or criminal acts, or the conversion of trust account funds. ALPS's reservation of rights letter also specifically included the right to be reimbursed for the portion of fees incurred in the defense of claims that were deemed not covered under the policy.

Ingaldson Fitzgerald then retained independent counsel to defend against the former client and the trustee's claim, and ALPS paid the fees incurred by that attorney.⁶ During adversary proceedings in the underlying suit, the bankruptcy court in the District of Alaska twice granted partial summary judgment against Ingaldson Fitzgerald.⁷ The trustee then dismissed the remaining cause of action, sought entry of final judgment, and moved for attorney's fees and costs.⁸

In September 2011 ALPS filed suit against Ingaldson Fitzgerald in the United States District Court for the District of Alaska. ALPS sought declarations that its policy did not cover the underlying claims and that it was not obligated to furnish an appeal bond, as well as a monetary award reimbursing it for the cost of defending Ingaldson Fitzgerald. The district court determined that Ingaldson Fitzgerald did not meaningfully contest either of the first two requests for declaratory relief and thus granted ALPS its desired declarations on summary judgment.⁹ But Ingaldson Fitzgerald did contest ALPS's claim for reimbursement of the cost of defense in the underlying suit, and it moved for partial summary judgment on this point. ALPS opposed Ingaldson Fitzgerald's motion and cross-moved for summary judgment.

The district court granted Ingaldson Fitzgerald's motion for partial summary judgment.¹⁰ The district court noted that the policy provided ALPS with a right to reimbursement¹¹ but concluded that the reimbursement provision was not in compliance with Alaska insurance law and that the provision was therefore unenforceable.¹² Specifically, the district court concluded that the reimbursement provision was inconsistent with AS 21.96.100(d)

, which provides that in furnishing the insured with independent counsel, an insurer "shall be responsible only for the fees and costs to defend those allegations for which the insurer either reserves its position as to coverage or accepts coverage."¹³ The district court also determined that "Alaska law prohibits the inclusion of a right to reimbursement in insurance policies in the state and does not allow ALPS to provide insurance policy coverage that contradicts this prohibition."¹⁴ The district court therefore granted Ingaldson Fitzgerald partial summary judgment on ALPS's claim for reimbursement.¹⁵

ALPS appealed to the Ninth Circuit.¹⁶ The Ninth Circuit certified two questions to this court, distinguishing between situations in which an insurer has a duty to defend but ultimately faces no liability and situations in which the duty to defend never arises.¹⁷ We granted the Ninth Circuit's request that we answer the certified questions. The parties provided full briefing of the issues, and the Alaska Division of Insurance filed an amicus brief at our request. Oral argument was held before this court on December 15, 2015.

III. STANDARD OF REVIEW

Alaska Appellate Rule 407(a)

permits us to accept certified "questions of law of this state which may be determinative of the cause then pending in the certifying court and as to which it appears to the certifying court there is no controlling precedent in [this court's] decisions." We have explained that "[i]n deciding a certified question of law, we must ‘stand in the shoes of the certifying court, yet exercise our independent judgment.’ "¹⁸ This entails "selecting the rule of law that is most persuasive in light of precedent, reason, and policy."¹⁹

We interpret statutes "according to reason, practicality, and common sense, considering the meaning of the statute's language, its legislative history, and its purpose."²⁰ We "use a sliding scale approach to statutory interpretation, in which ‘the plainer the statutory language is, the more convincing the evidence of contrary legislative purpose or intent must be.’ "²¹

IV. DISCUSSION

A. When An Insurer Has A Duty To Defend, Alaska Law Prohibits Enforcement Of A Policy Provision Entitling That Insurer To Reimbursement Of Fees And Costs Incurred During The Defense Of Claims Under A Reservation Of Rights.

Answering the first certified question requires us to answer two sub-questions.

First, does Alaska law generally require insurers to pay defense costs, without reimbursement, when they reserve rights? And second, if so, does Alaska law bar attempts to contract around this requirement? The answer to both questions is yes, even in circumstances where (1) an insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) the claims are later determined to be excluded from coverage under the policy.

1. Alaska case law

Before turning to the text of AS 21.96.100

, we first survey the common law context in which the statute was passed. Our examination of an insurer's options in policy defense situations begins with Continental Insurance Co. v. Bayless & Roberts, Inc.²² In Continental an insured was sued, and its insurer became convinced that the insured had breached the insurance contract.²³ The insurer informed the insured that it would only continue to defend the case subject "to a reservation of [the insurer's] right to later deny liability on the ground of the alleged breach."²⁴ We rejected this approach and held that in policy defense situations "the insured has a right to demand an unconditional defense."²⁵ We further recognized three options for an insurer...