Elliott v. Donahue

• Decision Date: 29 April 1992
• Docket Number: No. 90-2618,90-2618
• Citation: 485 N.W.2d 403,169 Wis.2d 310
• Parties: Karen ELLIOTT, Plaintiff, v. Michael G. DONAHUE, Defendant-Appellant-Petitioner, Heritage Mutual Insurance Company, Defendant-Respondent, David M. Mikrut, Michael G. McErlean, Allstate Insurance Company, and The Cincinnati Insurance Company, Defendants. . Oral Argument
• Court: Wisconsin Supreme Court

Page 403

485 N.W.2d 403

169 Wis.2d 310

Karen ELLIOTT, Plaintiff, v. Michael G. DONAHUE, Defendant-Appellant-Petitioner Heritage Mutual Insurance Company, Defendant-Respondent David M. Mikrut, Michael G. McErlean, Allstate Insurance Company, and The Cincinnati Insurance Company, Defendants.

No. 90-2618.

Supreme Court of Wisconsin.

Oral Argument April 29, 1992.

Opinion Filed June 25, 1992.

For the defendant-appellant-petitioner there were briefs by David A. Hudec, Gabrielle Boehm and Hudec Law Offices, S.C., East Troy and oral argument by David A. Hudec.

For the defendant-respondent there was a brief by Arnold P. Anderson, James W. Mohr, Jr. and Mohr, Anderson & McClurg, S.C., Hartford and oral argument by Arnold P. Anderson.

Amicus curiae brief was filed by Terrance L. Kallenbach and Capwell, Berthelsen, Nolden, Casanova, Pitts & Kallenbach, Ltd., Racine for the Civil Trial Counsel of Wisconsin.

CALLOW, Justice.

This is a review under sec. (Rule) 809.62, Stats., of a published decision of the court of appeals, Elliott v. Donahue, 163 Wis.2d 1059, 473 N.W.2d 155 (Ct.App.1991). The court of appeals affirmed in part and reversed in part a decision of the circuit court for Walworth County, Judge James L. Carlson, and held among other things that petitioner Michael Donahue was not entitled to recover attorney fees incurred in successfully defending coverage under an insurance policy issued by respondent Heritage Mutual Insurance Company. We reverse this portion of the decision of the court of appeals and hold that the insured is entitled to recover attorney fees incurred in successfully defending coverage under the insurance policy.

The nature and language of the insurance contract contemplate that the insurer will provide indemnification and defense for claims described in the policy in exchange for periodic premium payments. Under the terms of the policy, the insured's liability to the insurer is limited to the payment of the premium. When the insurer declines to provide insurance coverage thereby forcing the insured to litigate the issue of coverage for a claim that is alleged to fall under the insurance policy, the insured is deprived of the benefit that was bargained for and paid for with the periodic premium payments. We hold that sec. 806.04(8), Stats., which recognizes the principles of equity, permits the recovery of reasonable attorney fees incurred by the insured in successfully establishing coverage.

The relevant facts are not in dispute. On January 16, 1988, Karen Elliott was involved in an automobile accident with several vehicles, one of which was operated by Michael Donahue and owned by David Mikrut. Mikrut's vehicle was uninsured. However, Donahue's stepmother held an insurance policy from Heritage Mutual Insurance Company that covered Donahue while operating another's car "with the reasonable belief of having permission to do so."

On June 3, 1988, Elliott commenced an action against Donahue, the other parties involved in the accident, and their respective insurance companies to recover for injuries sustained in the accident. Donahue tendered his defense to Heritage, who subsequently informed him by letter that it was denying coverage and defense based upon the non-permissive use exclusion in the policy. Heritage claimed that Donahue did not have Mikrut's permission to operate Mikrut's vehicle. Heritage advised Donahue to hire an attorney at his own expense.

Donahue retained counsel to represent him in the litigation. As a party to the original action, Heritage suggested a bifurcated trial to decide the coverage issue separate from the determination of liability and damages. Judge John Race subsequently ordered a bifurcated trial. However, proceedings on the claim for damages were not suspended pending resolution of the coverage issue. Donahue's counsel represented him on both the claims for damages as well as in the coverage dispute.

A jury returned a verdict finding that Donahue was operating the automobile with the permission of the owner and the circuit court entered a judgment finding that Donahue was covered under the insurance policy issued by Heritage. Heritage immediately assumed Donahue's defense and settled all pending claims against him.

Donahue filed a motion after the verdict to recover from Heritage his actual attorney fees and costs for the litigation. The circuit court denied the motion. Donahue appealed the decision of the circuit court denying him recovery for attorney fees and costs to the court of appeals. The court of appeals held that Donahue was entitled to recover costs and reasonable attorney fees incurred in defending himself on the claim for damages. However, it concluded that he was not entitled to attorney fees with respect to the coverage issue because the "American Rule" disallows an award of attorney fees under the theory that each party should be responsible for their own costs of litigation. Furthermore, the court of appeals concluded that the denial of coverage was not in bad faith nor was it unjustified. Elliott, 163 Wis.2d at 1068-69, 473 N.W.2d 155. The sole issue on review concerns whether an insured may recover attorney fees incurred in successfully defending coverage under an insurance policy.

Donahue sets forth several arguments to support his position that an insured is entitled to an award of attorney fees upon successfully defending coverage. First, Donahue argues that Heritage's denial of coverage constituted a breach of its contractual duty to defend and that attorney fees incurred due to that breach are ordinary damages. In response, Heritage argues that it did not breach the insurance contract because a debatable issue of coverage existed in this case and, consistent with the requirements detailed in Mowry v. Badger State Mut. Cas., 129 Wis.2d 496, 385 N.W.2d 171 (1986), Heritage requested a bifurcated trial to resolve the coverage issue separate from the liability issue. Heritage points out that once coverage was established, it immediately assumed the defense of Donahue.

Whether a party to a contract has breached a contractual provision is a question of law. Mowry, 129 Wis.2d at 527, 385 N.W.2d 171. Questions of law are decided by this court without deference to the circuit court or the court of appeals. Id.

The Mowry court addressed a situation similar to the one at hand. In Mowry, the insurance carrier denied coverage in a suit against a family member of the insured because a debatable issue existed regarding ownership of the vehicle involved in the accident. The trial court granted the insurer's request for a bifurcated trial and the determination of coverage preceded any proceedings on the issue of liability. Once coverage was established, the insurer settled the claims against the insured. However, the settlement amount exceeded the policy limits. The insured, therefore, brought an action against the insurer claiming that the insurer breached the contract of insurance by denying coverage and, therefore, should be liable to the insured for the amount of the settlement that exceeded the limits of the policy. The Mowry court held that the insurance carrier did not breach its contractual duties of coverage and defense because the issue of coverage was "fairly debatable," the resolution of the coverage issue preceded the trial on liability, and the insurer immediately assumed the insured's defense once coverage was established. Mowry, 129 Wis.2d at 528-29, 385 N.W.2d 171.

An insurer does not breach its contractual duty to defend by denying coverage where the issue of coverage is fairly debatable as long as the insurer provides coverage and defense once coverage is established. In the present case, the issue of coverage was fairly debatable. ¹ The Heritage policy provided insurance for Donahue while operating another's automobile only if Donahue reasonably believed that he had permission to drive the vehicle. Immediately following the accident, Donahue commented to the reporting police officers that he did not have permission to drive Mikrut's vehicle. In light of Donahue's comment, coverage became a viable issue. At trial, the jury concluded that Donahue's comment to the police officers was strategically made and false. As in Mowry, once coverage was established, Heritage immediately assumed Donahue's defense. Therefore, we conclude that Heritage did not breach its duty to defend under the insurance contract by initially denying coverage.

Contrary to Heritage's assertion, however, it did not comply with the requirements of Mowry. While a bifurcated trial was ordered in this case, the coverage and liability issues were litigated simultaneously, forcing Donahue to retain counsel to simultaneously defend him in both aspects of the case. To be entirely consistent with Mowry, the insurer should not only request a bifurcated trial on the issues of coverage and liability, but it should also move to stay any proceedings on liability until the issue of coverage is resolved. Heritage failed to do so. The Mowry court advised that an "insurer may need to provide a defense to its insured when the separate trial on coverage does not precede the trial on liability and damages." Id. at 528, 385 N.W.2d 171. Because Heritage did not provide such needed defense, it is liable to Donahue for the attorney fees incurred by Donahue with respect to the liability issue. See Meiser v. Aetna Casualty & Surety Co., 8 Wis.2d 233, 240-41, 98 N.W.2d 919 (1959). The record in this case indicates that Heritage immediately assumed Donahue's defense once coverage was established.

Second, Donahue argues that Heritage is required to reimburse him for attorney fees incurred in successfully defending coverage because the insurance contract provides for payment by the insurer for any "reasonable expenses incurred at our request" (emphasis in original). Donahue contends that Heritage's request for a bifurcated trial to obtain a declaratory judgment on...