Gross v. Lloyds of London Ins. Co., 83-664

Citation358 N.W.2d 266,121 Wis.2d 78
Decision Date27 November 1984
Docket NumberNo. 83-664,83-664
PartiesSandra A. GROSS, Plaintiff-Respondent, v. LLOYDS OF LONDON INSURANCE COMPANY, a foreign corporation, The Experimental Aircraft Association, Inc., a Wisconsin corporation, Imperial Casualty and Indemnity Company, a foreign corporation, and Milwaukee County, Defendants-Respondents, Dr. Ivan D. Frantz, Defendant and Third-Party Plaintiff-Appellant-Petitioner, Piper Aircraft Corporation, Third-Party Defendant-Respondent.
CourtUnited States State Supreme Court of Wisconsin

J. Ric Gass, Milwaukee (argued), for Frantz; Mary J. O'Connor and Kasdorf, Dall, Lewis & Swietlik, S.C., Milwaukee, on brief.

Mark A. Peterson, Milwaukee, and Alvin E. Domash, Chicago, Ill. (argued), for defendant-respondent, Imperial Cas. & Indem. Co.; Michael R. Wherry and Mulcahy & Wherry, S.C., Milwaukee, and Richard E. Mueller and Lord, Bissell & Brooks, Chicago, Ill., on brief. CALLOW, Justice.

This is a review of a decision 1 of the court of appeals affirming an order of the circuit court for Milwaukee county, Judge Harold B. Jackson, Jr., allowing an insurance company to deposit in court a check representing the limits of its coverage under a liability policy, thereby relieving the company of its defense in an action filed against its insured and dismissing the company from the action. We reverse the court of appeals.

The issue presented for review is whether an insurer may terminate the defense of its insured by tendering its policy limit for settlement pursuant to the terms of the liability insurance policy.

On July 30, 1982, Dr. Ivan D. Frantz submitted an application to the Imperial Casualty and Indemnity Company (Imperial) for the renewal of a policy of aircraft bodily injury liability insurance. 2 The application was in the form of a conditional insurance binder, 3 and it stated that the limits of liability for bodily injury were $100,000 for each person and $300,000 for each occurrence. The policy itself was issued on August 11, 1982.

On August 5, 1982, at The Experimental Aircraft Association's annual fly-in at Oshkosh, Wisconsin, an unoccupied Piper aircraft, owned by Frantz, rolled into the tent occupied by Sandra Gross, seriously injuring her. Imperial investigated the accident and concluded that Gross's damages for injuries could greatly exceed the policy limits of $100,000. On October 5, 1982, Imperial forwarded a check for $100,000 along with a partial release and indemnification agreement to Gross's attorney in an attempt to settle the claim. The proposed release was a standard Pierringer-type release, Pierringer v. Hoger, 21 Wis.2d 182, 124 N.W.2d 106 (1963), which would have released both Imperial and Frantz from any liability resulting from the accident. Gross rejected payment of the policy limits and refused to execute the release. On October 18, 1982, Gross commenced an action in Milwaukee county circuit court seeking damages of $11,000,000 against Imperial, Frantz, The Experimental Aircraft Association, and Lloyds of London (the EAA's insurer).

On December 3, 1982, Imperial filed a motion in the trial court seeking permission to pay its policy limit into court and seeking to be relieved from any further obligation to defend Frantz under the terms of the insurance policy. The policy issued to Frantz contained the following language: 4

"Imperial ... [a]grees ...

"....

"To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of:

"A. bodily injury, sickness or disease, including death ....

"....

"caused by an occurrence and arising out of the ownership, maintenance or use of the aircraft, and the Company shall defend any suit alleging such bodily injury or property damage and seeking damages which are payable under the terms of this policy, even if any of the allegations of the suit are groundless, false or fraudulent; but the Company may make such investigation and settlement of any claim or suit as it deems expedient, but the Company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the Company's liability has been exhausted by payment of judgments or settlements or after such limit of the Company's liability has been tendered for settlements." (Emphasis added.)

The trial court entered an order allowing Imperial to pay its policy limit into court and relieving it of any further obligation to defend Frantz in the litigation. The court of appeals affirmed the trial court's order, stating that the plain language of the policy envisioned that the company could be relieved of its obligation to defend its insured either upon payment of a judgment or settlement in the amount of the policy limit or upon tender of the policy limit to the court. 118 Wis.2d at 371-72, 347 N.W.2d 899. In addition, the court of appeals found that allowing the insurer to be relieved of its obligation to defend the insured upon payment of the policy limit into court was not contrary to public policy. Id. at 376, 347 N.W.2d 899. While the policy at issue was a renewal of a previously issued policy, the original policy of insurance was not made part of the record. The court of appeals did not comment on the fact that, at the time of the accident, Frantz had not yet received the policy and nothing in the record showed that Frantz had any notice of Imperial's right to terminate its defense upon tender of the policy limits for settlement. Frantz petitioned this court for review, and we granted the petition.

The issue we decide is whether a provision in a liability insurance policy allowing the insurer to terminate the defense of its insured by tendering the policy limit for settlement is enforceable. This issue involves a question of law, and this court need not give special deference to the determination of lower courts. LePoidevin v. Wilson, 111 Wis.2d 116, 121, 330 N.W.2d 555 (1983).

Policies of liability insurance impose two duties on the insurer with respect to the insured--the duty to indemnify and the duty to defend. 7C J. Appleman, Insurance Law and Practice, sec. 4684 at 80-82 (Berdal ed. 1979). The clauses in liability policies defining these two duties have undergone a number of changes over the years. Prior to 1966 clauses defining the insurer's duty to defend were contained in a different section of the policy than clauses defining the insurer's duty to indemnify. See N. Risjord and J. Austin, Automobile Liability Insurance Cases, (Standard Provisions and Appendix) at 219 (1964 & Supp.1974). The pre-1966 policy form contained the following language with respect to the insurer's duties to indemnify and defend:

"[The company agrees]

"To pay on behalf of the insured all sums which the insured shall become legally obligated to pay ...

"....

"and the company shall defend any suit alleging such bodily injury or property damage and seeking damages which are payable under the terms of this policy, even if any of the allegations of the suit are groundless, false or fraudulent; but the company may make such investigation and settlement of any claim or suit as it deems expedient." (Emphasis in original.) E. Van Vugt, Termination of the Insurer's Duty to Defend by Exhaustion of Policy Limits, 44 Ins.Couns.J. 254, 257 (1977).

It was not clear under policies containing this type of language whether the insurer's duty to defend the insured would be terminated once the policy limits had been paid out.

In 1966 the standard form liability policy was revised, and the insurer's duties to indemnify and defend were stated in the same paragraph. C. Atkins, Insurer's Obligation to Defend After Exhaustion of Policy Limits, 33 Ins.Couns.J. 250, 251 (1966). The 1966 policy language directly defined the insurer's right to terminate the defense of its insured as follows:

"The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay but the Company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the Company's liability has been exhausted by payment of judgments or settlements." (Emphasis added.) 1 R. Long, The Law of Liability Insurance, sec. 5.12 at 5-74 (1984).

The 1966 revisions were meant to clarify when the insurer's duty to defend the insured has been satisfied by providing that the duty to defend ceases after the policy limits are exhausted either by payment of judgments or settlements. 7C J. Appleman, supra, sec. 4682 at 29. Despite the clear policy language, Appleman cautions that the insurer's duty to defend the insured may continue even after the policy limits have been exhausted:

"Despite the 1966 and subsequent revisions, the primary insurer may not walk away from the insured by paying relatively low limits into court and abandon the insured with a substantial judgment simply because the cost of appeal or other handling may be formidable. The insured's interests may demand continued protection despite threatened exhaustion of the primary limits." Id. at 36 (footnote omitted).

In its opinion, the court of appeals reasoned that Appleman's caveat spoke to policies lacking the "tendered for settlements" language present in the Imperial policy. 118 Wis.2d at 374, 347 N.W.2d 899. The language contained in the Imperial policy permitting the insurer to terminate its duty to defend once the policy limits have been tendered for settlement (as well as when the limits have been exhausted by payment of judgments or settlements) is a further revision in the language of liability insurance policies which first appeared several years ago. We conclude the "payment of judgments or settlements" language in the 1966 policy form contemplates payment upon the conclusion of the litigation or termination of the claim by settlement. The "tendered for settlements" language added by the insurer contemplates payment prior to the conclusion of the litigation or...

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