Combined Investigative Services, Inc. v. Scottsdale Ins. Co., 91-0688

Citation165 Wis.2d 262,477 N.W.2d 82
Decision Date23 October 1991
Docket NumberNo. 91-0688,91-0688
PartiesCOMBINED INVESTIGATIVE SERVICES, INC., Plaintiff-Appellant, v. SCOTTSDALE INSURANCE COMPANY, American X/S Insurance Company and Diversified Financial Services, Inc., Defendants-Respondents. 1
CourtCourt of Appeals of Wisconsin

John J. Wargo of John J. Wargo Law Offices, S.C., Racine, for plaintiff-appellant.

Robert P. Ochowicz and Vicki L. Arrowood of Kasdorf, Lewis & Swietlik, S.C., Milwaukee, for defendants-respondents.


SNYDER, Judge.

Combined Investigative Services, Inc. appeals from a summary judgment granted in favor of Scottsdale Insurance Company and American X/S Insurance Company, Scottsdale's Wisconsin agent. We affirm the trial court regarding bad faith and tortious interference with contract. But because we conclude that independent actual notice does not satisfy the notice requirement of sec. 618.41(9), Stats., we reverse on that issue.

The historical facts are straightforward. Combined is a detective agency licensed to do business in Wisconsin. To maintain that license, it must file with the state a certificate of insurance. Section 440.26(3) and (4), Stats.; 2 Wis.Adm.Code sec. RL 33.01. Since 1985, combined obtained its liability insurance through Scottsdale, whose managing general agent in Wisconsin is American X/S. Scottsdale is a "surplus lines" insurer--an unlicensed carrier operating without a certificate of authority to do business in Wisconsin, but nonetheless permitted to do so (generally because there are no licensed carriers in the state offering coverage for a particular type of risk) if certain conditions are met. In exchange for allowing a surplus lines insurer to operate without a license, the state imposes on it a surplus lines tax. See sec. 618.41(9), Stats.

The policy in question was to lapse on March 5, 1987. In January 1987, Diversified Financial Services, Inc., Combined's insurance agent, contacted American X/S for a renewal quote. Premiums are determined based on a given year's payroll figures. American X/S quoted Diversified a one-year premium price of $1994.

Combined agreed to the price but failed to make a timely payment, and the policy lapsed on March 5. The next day, however, it sent Diversified a check for $1994 plus fees and surplus lines tax. Diversified received the check on March 9 and cashed it. That same day, American X/S notified Diversified that the wrong payroll figures had been used and that, rather than $1994, the correct renewal premium was $3643. Despite Combined's protestations, American X/S refused to honor the lower quote. It agreed to backdate coverage, however, if Combined tendered the higher amount. Combined reluctantly paid. 3

At this point the procedural history grows somewhat lengthy. Combined filed suit against Diversified, American X/S and Scottsdale, alleging breach of contract and bad faith, and seeking both punitive and compensatory damages. American X/S and Scottsdale ("the defendants") moved for partial summary judgment, asserting that the bad faith claim failed to state a cause of action and that punitive damages are not allowed in a contract action. Autumn Grove Joint Venture v. Rachlin, 138 Wis.2d 273, 279, 405 N.W.2d 759, 762 (Ct.App.1987). Scottsdale also moved to enlarge the time in which to file for summary judgment. The trial court granted the time extension and dismissed the bad faith and punitive damages claims against the defendants. The court also called for additional briefing on tortious interference with contract.

Several days later, Combined moved for reconsideration and filed a brief in support of its claim of tortious interference with contract. On June 3, 1988, the motion was heard, the prior determination affirmed, and the tort claim dismissed. 4 The defendants then successfully moved for summary judgment on the grounds that there was no breach of contract, and even if there was, Combined suffered no damages. Combined moved for reconsideration of the dismissal of both the bad faith and breach of contract claims. 5

At the September 27, 1990 hearing on the motion to reconsider, the summary judgment on Combined's bad faith claim again was affirmed. Also at that hearing, Combined claimed for the first time that all the policies it had purchased through Scottsdale since 1985 were illegal contracts because they were devoid of any stamped or affixed notation containing the notice mandated by sec. 618.41(9), Stats. Combined claimed the policies' illegality entitled it to a full refund of all premiums ever paid. While admitting the notice was not stamped on the policies, American X/S claimed the notice was affixed to them in accordance with its standard practice.

On November 5, a hearing was held on the statutory compliance issue. Based on various affidavits and depositions suggesting that Combined independently had actual notice of the required information, the trial court stated that if that were the case, such notice would satisfy the statutory notice requirements. With that premise, the court then concluded that trial was appropriate on three issues: (1) whether the information required by sec. 618.41(9), Stats., was affixed; (2) if not, whether Combined in fact had independent actual knowledge of the statutory information; and (3) if so, whether it also had actual knowledge that statutory noncompliance could be used as a basis for a total premium refund. Finally, the trial court permitted Combined to amend its pleadings to allege failure to comply with sec. 618.41(9).

On November 14, Combined filed its amended summons and complaint, alleging failure to comply with sec. 618.41(9), Stats., and realleging bad faith and breach of contract. About the same time, the defendants deposed Combined's president, Gary Wait, who testified that, for each of the policy years, Combined was aware of all the statutory information regarding Scottsdale's surplus lines status. The defendants then moved for summary judgment based on Combined's independent actual notice. Combined did not formally oppose the motion, and it was never brought on for hearing. 6 The complaint was dismissed and Combined appealed to this court.

When reviewing a grant of summary judgment, we apply the same methodology as the trial court. Leverence v. United States Fidelity & Guar., 158 Wis.2d 64, 73, 462 N.W.2d 218, 222 (Ct.App.1990). We will reverse a trial court's decision granting summary judgment only if the trial court incorrectly decided a legal issue or if material facts were in dispute. Hammer v. Hammer, 142 Wis.2d 257, 263, 418 N.W.2d 23, 25 (Ct.App.1987).


The first issue on appeal is whether the trial court erred in dismissing Combined's bad faith claim against the two defendants. Combined constructs its argument along these lines: knowing that Combined could not operate without a certificate of insurance and that it would take several months to obtain substitute insurance, the defendants used their superior position "to extort an additional premium" from Combined. Combined concludes that denying a claim for the policy is the "functional and legal equivalent" of denying a claim under the policy. We disagree.

Wisconsin recognizes only three bad faith insurance actions. They are:

1. an insured's action against the insurer for bad faith in settling with a third party claimant where the ultimate judgment exposes the insured to a judgment in excess of the policy coverage;

2. an insured's action against the insurer for failure to satisfy the insured's nondebatable claim; and

3. a third party's action against the insurer for failure to reimburse a worker's compensation claim.

See Kranzush v. Badger State Mut. Casualty Co., 103 Wis.2d 56, 60-62, 307 N.W.2d 256, 259-60 (1981). In each of these situations, the tort of bad faith stems not from a tortious breach of contract, but from a breach of the fiduciary duty the insurer owes its insured resulting from the relationship created by the insurance contract. Ford Motor Co. v. Lyons, 137 Wis.2d 397, 423, 405 N.W.2d 354, 365 (Ct.App.1987).

Here the trial court determined that there was no breach of the fiduciary relationship between Combined and the defendants because the parties were merely negotiating the renewal of the policy:

It's not a question of the insurer failing to perform fiduciary duties imposed by the policy.... The law doesn't say every time there's an insurance policy that anything that happens between the insured and the insurer gives rise to bad faith. It's only those specific situations which have been recognized in Kranzush.

We agree. Wisconsin's law regarding bad faith claims against insurers is clearly defined. The fiduciary relationship exists only in connection with performing the insurer's obligations under the policy. This case does not involve an excess judgment, an insured's failure to satisfy an undebatable claim or a claim for worker's compensation. We affirm the trial court's refusal to extend the law into uncharted areas. See Ford Motor Co., 137 Wis.2d at 425-26, 405 N.W.2d at 365-66.


Next, Combined contends that American X/S tortiously interfered with the contract between Scottsdale and Combined by informing Combined that American X/S had erred in the quote and would cancel the insurance contract unless a higher amount were paid. The trial court rejected this theory, as do we. Tortious interference with contract is conduct which induces or otherwise intentionally causes a third person not to perform a contract. See Augustine v. Anti-Defamation League, 75 Wis.2d 207, 217-22, 249 N.W.2d 547, 552-55 (1977). There is no third person here. Scottsdale, through its agent American X/S, is one party; Combined is the other. No third person was induced or caused not to contractually perform.

Moreover, Combined has not...

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