Guarantee Abstract and Title Co., Inc. v. Interstate Fire and Cas. Co., Inc., 51199

• Decision Date: 01 November 1980
• Docket Number: No. 51199,51199
• Citation: 228 Kan. 532,618 P.2d 1195
• Parties: GUARANTEE ABSTRACT AND TITLE COMPANY, INC., Appellee and Cross-Appellant, v. INTERSTATE FIRE AND CASUALTY COMPANY, INC., Appellant and Cross-Appellee.
• Court: Kansas Supreme Court

Page 1195

618 P.2d 1195

228 Kan. 532

GUARANTEE ABSTRACT AND TITLE COMPANY, INC., Appellee and Cross-Appellant, v. INTERSTATE FIRE AND CASUALTY COMPANY, INC., Appellant and Cross-Appellee.

No. 51199.

Supreme Court of Kansas.

Nov. 1, 1980.

Syllabus by the Court

1. Public policy requires that payment of punitive damages rest on the party who committed the wrong, rather than his insurance company. Following Koch v. Merchants Mutual Bonding Co., 211 Kan. 397, 507 P.2d 189 (1973). We interpret that rule to include any person who has incurred such liability regardless of whether the liability resulted from the insured's own acts or those of his employee, servant or agent.

2. The test to determine whether an insurer has a duty to appeal a case on behalf of its insured is one of good faith and fair dealing on the part of the insurer, balancing the rights of both the insurance company and the insured.

3. In ruling on a motion for directed verdict pursuant to K.S.A. 60-250, the court is required to resolve all facts and inferences reasonably to be drawn from the evidence in favor of the party against whom the ruling is sought, and where the evidence is such that reasonable minds could reach different conclusions thereon, the motion must be denied and the matter submitted to the jury. The same basic rule governs appellate review of a motion for a directed verdict. Following Frevel v. McAloon, 222 Kan. 295, Syl. P 5, 564 P.2d 508 (1977).

4. In a civil case, the record is examined and it is held the trial court erred in: 1) allowing coverage for punitive damages; 2) awarding attorney fees to Guarantee; 3) directing a verdict in favor of Interstate on the question of Interstate's duty to settle the case. The trial court did not err in: 1) finding Guarantee's promissory note to Chicago Title to be enforceable and 2) finding Interstate had a duty to appeal on behalf of Guarantee in Ford and awarding costs of the appeal.

Reid F. Holbrook, of Steineger & Holbrook, P. A., Kansas City, and Ronald D. Garrison, Kansas City, of the same firm, argued the cause and were on the brief for appellant and cross-appellee.

George Maier, Jr., of Weeks, Thomas, Lysaught & Mustain, Chartered, Kansas City, and Edward H. Powers, Sr., Kansas City, argued the cause and were on the brief for appellee and cross-appellant.

HERD, Justice:

This case arose out of Ford v. Guarantee Abstract & Title Co., 220 Kan. 244, 553 P.2d 254 (1976). Guarantee (appellee and cross-appellant) sued Interstate (appellant and cross-appellee) to recover the judgments and expenses assessed against it in Ford. Guarantee alleges the errors and omissions indorsement on Guarantee's liability insurance policy issued by Interstate covers punitive damages. Guarantee also alleges Interstate was guilty of bad faith and negligence in the defense of Guarantee in Ford. The trial court found for Guarantee on the first count and for Interstate on the second. Both parties appeal.

In Ford, Guarantee and its principal, Chicago Title Insurance Co., were found liable for the negligent and reckless acts of Carl Zimmerman, vice-president of Guarantee, for failing to obtain a deed in exchange for the payment of the purchase price and for failing to issue a title policy or return the purchase price as demanded by the Fords. The jury returned a verdict of $8,687.65 compensatory damages against each Guarantee and Chicago and punitive damages in the amount of $35,000 against Guarantee and $70,000 against Chicago. Guarantee and Chicago Title requested Interstate to appeal the decision, but Interstate refused to represent them. They obtained other counsel and appealed to this court. We affirmed the award of compensatory damages and reduced the punitive damages by one-half against both Guarantee and Chicago Title. The judgments were satisfied by the two parties and, on December 3, 1976, Chicago Title demanded indemnification of its judgment and expenses from Guarantee. Guarantee issued a promissory note to Chicago Title in the amount of $55,537.10 on December 24, 1976. No payments have been made on the note.

This action was filed December 27, 1976. Guarantee alleged that as agent for Chicago Title it was liable for both its own judgment and that of Chicago Title. It further alleged Interstate had issued a policy of insurance without being licensed to do business in Kansas and had paid only $5,236.86 on the judgments. Guarantee alleged in count one of the petition that Interstate was liable for all actual and punitive damages against Guarantee and Chicago Title under the terms of the insurance policy. Count two of the petition alleged Interstate was guilty of negligence and bad faith in its defense of Guarantee in the prior action and prayed Interstate be required to pay the entire judgment and for punitive damages in the amount in excess of $10,000. The trial court removed the case from the jury's consideration and directed a verdict for Guarantee on count one and for Interstate on count two. This appeal followed.

The trial court found punitive damages had been awarded against Guarantee and Chicago Title in Ford based upon Zimmerman's reckless conduct and reasoned that conduct was covered under the policy. The trial court also found Zimmerman's actions were not committed maliciously, nor had the corporation ratified his acts, and the court stated a finding of malice or evidence of corporate ratification of Zimmerman's actions were the sole exceptions that would exclude coverage under the policy. Interstate maintains the trial court erred in construing the policy to provide coverage for punitive damages and cites as error the trial court's interpretation of the policy to cover reckless conduct and its failure to apply policy exclusions. More importantly, Interstate advances a lengthy argument detailing public policy considerations regarding insurance against punitive damages. Our discussion of this issue will center around public policy considerations.

The trial court predicted Kansas appellate courts would adopt an exception to the general view prohibiting coverage for punitive damages based upon public policy grounds. The exception was discussed as dicta in Northwestern National Casualty Company v. McNulty, 307 F.2d 432 (5th Cir. 1962). The court in that case noted where an insured becomes vicariously liable as a result of the actions of his servant, agent or employee, the insured is permitted to protect himself with insurance. The court reasoned "if the employer did not participate in the wrong the policy of preventing the wrongdoer from escaping the penalties for his wrong is inapplicable." Northwestern at 440. Inasmuch as the court found punitive damages were assessed against Guarantee as a result of the actions of its employee Zimmerman, the trial court applied the above stated exception and found punitive damages could be covered under the policy.

At the outset, we wish to point out the trial court erred in finding Guarantee's liability was incurred solely as a result of the actions of Carl Zimmerman. Guarantee's culpability was noted by this court in Ford 220 Kan. at 265, 553 P.2d 254:

"In our opinion the evidence in this case warranted a substantial award of punitive damages. The evidence disclosed Chicago Title to have a net worth in excess of $31 million, and Guarantee to have a net worth in excess of $336 thousand. The continued refusal of these substantial companies to issue a title policy or return the Fords' money, after admittedly disbursing the same in violation of their fiduciary instructions, and in violation of the cardinal rule of title practice, was, to say the least, such gross neglect of duty as to evince a reckless indifference of the rights of the Fords...."

This is not, therefore, solely a case of vicarious liability. Consequently, the rule allowing insurance coverage for punitive damages in such cases is not applicable here. Nevertheless, we reject such a rule, regardless of whether liability is incurred vicariously or directly. It is against the public policy of this state to allow a wrongdoer to purchase insurance to cover punitive damages (Koch v. Merchants Mutual Bonding Co., 211 Kan. 397, 507 P.2d 189 (1973)), and we interpret that rule to include any person who has incurred such liability regardless of whether the liability resulted from the insured's own acts or those of his employee, servant or agent.

In light of our rejection of coverage for punitive damages, we deem it unnecessary to address Interstate's arguments concerning the trial court's interpretation of specific policy language.

Interstate claims the trial court erred in finding the promissory note issued by Guarantee to Chicago Title to be enforceable. Interstate argues the note is "illusory" because Guarantee has made no payments on it and there is no evidence the note is an actual obligation. Interstate further argues if Guarantee recovers anything it should be allowed to recover only the punitive damages assessed against Guarantee, and not those damages assessed against Chicago Title and assumed by Guarantee. All parties are in agreement that Chicago Title, as principal, is entitled to indemnification from its wrongdoing agent, Guarantee. The primary question is whether a demand note executed by Guarantee to Chicago Title for the amount to be indemnified constitutes payment. Interstate relies on Badger Lumber & Coal Co. v. Brown, 124 Kan. 255, 258, 259 P. 786 (1927), where the court stated:

"(T)he giving of a note for an existing indebtedness is not a payment or discharge of the indebtedness unless it is made so by the agreement of the parties."

A careful review of the record reveals Guarantee and Chicago Title intended the note to discharge the debt. Interstate has produced no evidence to indicate otherwise; consequently, its argument cannot stand.

Appellant's remaining issues pertaining to the trial court's judgment in favor of Guarantee for costs and expenses of the...