Continental Ins. Co. v. Bayless and Roberts, Inc.

• Decision Date: 07 March 1980
• Docket Number: 2923,Nos. 2922,s. 2922
• Citation: 608 P.2d 281
• Parties: CONTINENTAL INSURANCE COMPANY and Arthur Stanford, Appellants, v. BAYLESS AND ROBERTS, INC., Appellee. BAYLESS AND ROBERTS, INC., Cross-Appellant, v. CONTINENTAL INSURANCE COMPANY and Arthur Stanford, Cross-Appellees.
• Court: Alaska Supreme Court

Page 281

608 P.2d 281

CONTINENTAL INSURANCE COMPANY and Arthur Stanford, Appellants, v. BAYLESS AND ROBERTS, INC., Appellee.

BAYLESS AND ROBERTS, INC., Cross-Appellant, v. CONTINENTAL INSURANCE COMPANY and Arthur Stanford, Cross-Appellees.

Nos. 2922, 2923.

Supreme Court of Alaska.

March 7, 1980.

Sanford M. Gibbs, Hagans, Smith, Brown, Erwin & Gibbs, Anchorage, for appellants and cross-appellees.

Warren W. Matthews, Jr., Matthews, Dunn & Bailey, Anchorage, Lance C. Parrish, Fairbanks, for appellee and Cross-appellant.

OPINION

Before BOOCHEVER, C. J., RABINOWITZ, CONNOR and BURKE, JJ., and DIMOND, Senior Justice.

BURKE, Justice.

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.

I. Facts

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 Sears, Roebuck and Co., the seller of the air compressor and regulator that supplied air pressure to the paint pot.

Pursuant to the terms of its insurance contract, ¹ Continental undertook the defense of B & R in the action, retaining an experienced attorney, Richard Gantz of Hughes, Thorsness, Lowe, Gantz and Clark of Anchorage, for that purpose. During the course of its investigation of the case, Continental sent an investigator to take a statement from Robert Roberts, an officer of B & R. Roberts explained in his statement that he had agreed to lend the paint pot to Warbelow, who was a business customer and close friend of Roberts. This statement was forwarded to attorney Gantz who used it to prepare an affidavit which he planned to file in support of a motion for summary judgment. ² Roberts signed this affidavit on December 2, 1971, slightly more than a year and a half after Warbelow was injured. About eleven months later, on October 25, 1972, Roberts's deposition was taken in Anchorage. Gantz, who was unable to be present at the deposition, sent one of his associates, Jonathan Link, to appear on B & R's behalf. During the deposition Roberts denied all knowledge of the circumstances of the transfer of the paint pot to Warbelow. ³ Thus, Roberts's deposition testimony was in conflict with his previous statement to Continental's investigator and his signed affidavit. Whether Link attempted to prepare Roberts for the deposition by showing him a copy of his previous statement or affidavit is disputed. Although Link was aware of the contradiction in Roberts's statements, he did not stop the taking of the deposition to consult with Roberts. Immediately following the deposition Link met with Roberts, and they discussed the need to change the deposition before it was signed. See Rule 30(e), Alaska R.Civ.P. Gantz, however, subsequently decided not to correct the deposition, although he did write a letter to Roberts pointing out the inconsistencies in his statements and emphasizing the necessity of telling the truth at trial.

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." ⁴ The court imposed no sanctions against B & R in respect to Warbelow's claim. Gantz subsequently informed Stanford of the situation and suggested to Stanford that it might be appropriate for Continental at that point to send B & R a reservation of rights letter. At Stanford's request, Gantz drafted a form letter and sent it to Stanford.

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. ⁵ On January 8, Ingraham wrote to Continental demanding that it accept the outstanding settlement offer of $160,000, contending that such an offer was within policy limits. ⁶ On January 9, Continental delivered to Ingraham the reservation of rights notice which Gantz had prepared on December 20. The notice, which was in the form of a letter to B & R from Continental's attorney Keith E. Brown, stated that Continental would continue to conduct its defense of B & R but would "reserv(e) the right to disclaim coverage should liability be found against Bayless and Roberts, based upon the findings of Judge Taylor." ⁷ Ingraham rejected the proposed defense under a reservation of rights on the same day that Brown's letter was delivered and demanded an unconditional defense by Continental. This demand was rejected, and in a telephone call to Ingraham, Brown stated that Continental's intention was to continue to defend B & R under a reservation of rights. On January 11, B & R entered into a consent judgment in favor of Warbelow for $618,000. That same day Warbelow and B & R signed an agreement whereby Warbelow agreed not to execute on the judgment against any assets of B & R except its claim against Continental. In return, B & R agreed to prosecute its claim against Continental and to assign any proceeds of that claim to Warbelow. ⁸

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...