Continental Ins. Co. v. U.S. Fidelity & Guaranty Co.

• Decision Date: 04 August 1976
• Docket Number: No. 2547,2547
• Citation: 552 P.2d 1122
• Parties: CONTINENTAL INSURANCE COMPANY, Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY , Appellees.
• Court: Alaska Supreme Court

Page 1122

552 P.2d 1122

CONTINENTAL INSURANCE COMPANY, Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY , Appellees.

No. 2547.

Supreme Court of Alaska.

Aug. 4, 1976.

Kenneth P. Jacobus, Hughes, Thorsness, Lowe, Gantz & Powell, Anchorage, for appellant.

Roger E. Henderson, Houston & Lytle, Anchorage, for appellee.

OPINION

Before BOOCHEVER, C. J., and RABINOWITZ, CONNOR, and BURKE, JJ., and DIMOND, J. Pro Tem.

RABINOWITZ, Justice.

This appeal questions the award of attorney's fees in a declaratory judgment action between two insurers, United States Fidelity and Guaranty Co. and Continental Insurance Co. The substantive issues at the core of that action concerned which insurer had liability for costs of defense and actual recovery in wrongful death suits. Continental had tendered the defense to Fidelity. Upon Fidelity's refusal of the tender of defense, continental settled the wrongful death actions by paying $250,000 on behalf of its insured. Continental sought recovery of $250,000, plus the costs of defense from Fidelity. These issues were answered in Continental Insurance Co. v. United States Fidelity and Guaranty Co., 528 P.2d 430 (Alaska 1974), ¹ where we held that while Fidelity was not liable to indemnify Continental in the wrongful death actions, it did owe a duty to defend. We stated:

Given the vagaries in both law and fact, the wrongful death actions were at least potentially within the coverage of the U.S.F. & G. policy . . .. U.S.F. & G. should have undertaken (defendant) Northern's defense, and the failure to do so was a breach of the duty to defend created by the insurance contract. ²

We concluded that Fidelity should bear two-sevenths of Continetal's cost of defending the wrongful death actions. We also held that Fidelity had no liability to pay the damages recovered in the wrongful death actions. Our mandate to the superior court indicated that no costs or attorney's fees were allowed on appeal. ³

Upon remand the superior court awarded Fidelity, as the prevailing party, $18,836.16 attorney's fees. ⁴ This amount included the full costs claimed by Fidelity. Therefore, against the $18,836.16 award of attorney's fees, the trial court offset twosevenths of Continental's defense costs, resulting in a net recovery of Fidelity of $15,228.43.

The total amount of attorney's fees awarded, $18,836.16, included the costs claimed by Fidelity both before and after an offer of judgment, which had been tendered by Fidelity ⁵ in the course of the original litigation, and to the costs borne by Fidelity on appeal. In addition, the superior court held that interest on Continental's costs of defense claims ceased as of the date Fidelity made the offer of judgment. Against the $18,836.16 award of attorney's fees, the superior court offset two-sevenths of Continental's defense costs, resulting in a net recovery by Fidelity of $15,228.43.

Continental's first point on appeal is that the superior court was in error in holding Fidelity to be the 'prevailing party' entitled to attorney's fees within the meaning of Rule 82, Rules of Civil Procedure. Continental argues that since it ultimately was awarded money (two-sevenths of defense costs or $3,670.13), as a result of our determination that Fidelity had a duty to defend, it and not Fidelity was the prevailing party.

The determination of which party is the prevailing party is vested, in the first instance, in the trial judge's discretion ⁶ and is reviewable on appeal only for abuse. ⁷ Determination of who the prevailing party is does not automatically follow if the party receives an affirmative recovery, but rather is grounded on which party prevails on the main issues. ⁸ Here in the case at bar, where Fidelity's potential liability for payment of the actual recovery in the wrongful death actions greatly exceeded its potential liability for the cost of defense, the main issue cannot be said to be the cost of defense. ⁹ Thus, in light of the potential indemnification liability to which Fidelity was exposed in this matter, we cannot say that the superior court erred in its conclusion that Fidelity was the prevailing party.

Continental next argues that regardless of whether it was a prevailing party within the meaning of Civil Rule 82, the superior court erred in failing to award it costs and attorney's fees incurred prior to the Rule 68 offer of judgment tendered by Fidelity. The offer of judgment made by Fidelity was for $8,001, plus interest and costs. Ultimately, Continental's recovery amounted to less than this offer.

The purpose of Rule 68, Rules of Civil Procedure, is to encourage settlement of civil litigation and to avoid protracted litigation. ¹⁰ When the offer is accepted and the action settled, pursuant to Rule 68, the trial court is then vested with 'wide discretion' in determining attorney's fees, and awards of fees will be set aside only where it is shown discretion is clearly abused. ¹¹ Civil Rule 68 further provides that if the action does proceed to judgment, and '. . . the judgment finally obtained by the offeree is not more favorable than the offer, the offeree must pay the costs incurred after the making of the offer.'

In Jakoski v. Holland, 520 P.2d 569, 577-78 (Alaska 1974), the defendant made an offer of judgment which ultimately exceeded plaintiffs' recovery. The trial judge awarded attorney's fees incurred by plaintiffs up to the time of the offer of judgment and then awarded to defendant attorney's fees incurred after that time. Defendant appealed, contending that there was no proper basis for making the award of attorney's fees (plaintiffs' attorneys kept inadequate records), and that the award to him was inadequate in view of his attorney's affidavit to the effect that fees incurred amounted to almost twice as much as were awarded. In dictum we approved of the superior court's award of pre-offer attorney's fees stating:

Since the rule provides that the offer allow judgment 'with costs then accrued' and since costs under Alaska Civil Rule 82(a) include the allowance of an attorney's fee, it is clear that the (plaintiffs) were entitled to an award for attorney's fees incurred to the date of the offer of judgment.

Appellant seeks to elevate Jakoski to the level of a mandatory rule which requires a trial judge to award costs incurred prior to an offer of judgment in all instances. We decline to extend Jakoski that far. There we approved of the trial court's exercise of discretion in awarding such costs; here we cannot say the trial judge abused his discretion by failing to award them. Just as there are sound reasons for awarding such costs, there are reasons for not doing so. First, Rule 68 itself does not require that costs incurred prior to an offer of judgment be awarded. Thus, it is clear such awards are in the trial court's discretion. Second, to automatically award such costs encourages offerees to continue pressing suit. Third, appellant's construction of Civil Rule 68 would act to discourage potential offerors from making offers of judgment in general, and especially as the case progresses and costs mount, because by virtue of the tender of the offer they would be binding themselves to finance the attorney's fees of their opponents. ¹² In general we think that appellant's interpretation would encourage litigation and discourage settlement, thereby defeating the intent underlying Civil Rule 68. ¹³

Just as automatic awards of attorney's fees incurred prior to offers of judgment encourage offerees to continue pressing suit, refusals to make such awards simply on the basis that the offeree ultimately fails to recover judgment as large as the offer tendered may act to encourage acceptance of offers which do not fairly compensate the offeree for infringement of its legal rights. The automatic consequences of obtaining a judgment not more favorable than an earlier unaccepted offer are spelled out in our Rule 68. Any additional consequences which a trial court imposes in its discretion normally should be supported by reasons on the record, so that a reviewing court can determine whether discretion has been abused. Here the superior court failed to indicate reasons for not awarding pre-offer attorney's fees to the offeree beyond the fact that ultimately the offeror was the prevailing party within the meaning of the rule.

However, as we have previously indicated, in no sense could Continental (appellant offeree) be regarded as a 'prevailing party' within the meaning of Rule 68 or Rule 82. Unlike the situation in Jakoski v. Holland, where the offeree was a prevailing party within Rule 82 (though not within Rule 68), and consequently had a right to some attorney's fees under that rule, here it is difficult to conceive of a reason why the offeree is entitled to recover pre-offer attorney's fees. While the superior court's reasons for doing so are not clear, the record here does disclose an appropriate instance to accord the trial court's ruling some presumption of validity. See Albritton v. Estate of Larson, 428 P.2d 379, 383-84 (Alaska 1967). Consequently, we hold that the superior court's decision on this point was not an abuse of discretion.

Appellant's third contention in this appeal is that it was error on the superior court's part to award Fidelity the attorney's fees it incurred in the earlier appeal to this court. In our opinion on that appeal no memtion was made of whether, and if so to whom, costs and attorney's fees should be awarded. However, in our mandate we directed that neither party was to be awarded costs or attorney's fees. ¹⁴ Article IV, Section 15 of the Alaska Constitution provides in part that the Supreme Court shall '. . . make and promulgate rules governing practice and procedure in civil and criminal cases in all courts.' Pursuant to this constitutional grant, this court promulgated Rule 29, Appellate Rules, which vests the discretion to determine costs and attorney's fees pertaining to appeals in...