Lakeside Foods Inc v. Liberty Mut. Fire Ins. Co

Decision Date21 July 2010
Docket NumberCir. Ct. No. 2007CV654,Appeal No. 2009AP1428
PartiesLakeside Foods, Inc., Plaintiff-Appellant, v. Liberty Mutual Fire Insurance Co., Defendant-Respondent.
CourtWisconsin Court of Appeals

APPEAL from a judgment of the circuit court for Manitowoc County: JEROME L. FOX, Judge. Affirmed in part, reversed in part and cause remanded.

Before Brown, C.J., Neubauer, P.J., and Snyder, J.

¶l NEUBAUER, P.J. Lakeside Foods, Inc., ("Lakeside") appeals from a summary judgment in favor of Liberty Mutual Fire Insurance Company ("Liberty") on a duty to defend and bad faith claim. Lakeside alleges that Libertyfailed to provide it with an immediate and complete defense against a liability claim filed in California. Lakeside premises its contention primarily on Liberty's alleged failure to respond to its tender of defense for a three-month period after which Liberty reserved its rights and refused to pay reasonable attorney fees to Lakeside's choice of counsel. The trial court determined that Liberty and Lakeside reached an oral agreement regarding the reimbursement of attorney fees incurred in Lakeside's defense and, therefore, Liberty did not breach its duty to provide a full and complete defense. We reverse the trial court's judgment and remand for further proceedings because the facts surrounding the alleged oral agreement resolving all defense issues are disputed, as are the facts relating to Liberty's alleged bad faith. Additionally, the trial court erred in its determination that the California Cumis statute applies.1 However, we affirm the trial court's ruling to the extent that the court found that there was no breach of the duty to defend based solely on Liberty's failure to respond to the tender of defense for three months.

BACKGROUND

¶2 Lakeside is a food packaging company based in Manitowoc, Wisconsin, with facilities in Wisconsin, Minnesota, and Ohio. Lakeside purchased a commercial general liability insurance policy from Liberty for a coverage period of May 1, 2005, to May 1, 2006. Liberty is an insurance company whose Appleton, Wisconsin office issued the general liability insurance policy to Lakeside. The insurance policy covered, among other things, third-party claims of personal injury resulting from Lakeside's products or work.

¶3 Beginning in 2004, Lakeside entered into an agreement with a California firm, OnTech, to seal and process self-heating containers. OnTech is the owner of self-heating technology and another firm, Sonoco, is the manufacturer of the self-heating containers that utilizes OnTech's technology. From 2003 to 2005, Lakeside filled OnTech's orders. Beginning in 2005, in addition to filling OnTech's orders, Lakeside entered into a packaging agreement with one of OnTech's customers, WP Beverage Partners ("WP"), to directly fill WP's orders.

¶4 On February 22, 2006, OnTech filed a lawsuit in Orange County Superior Court against WP for nonpayment of invoices. On June 19, 2006, WP responded to OnTech's suit by filing a counterclaim and additional cross-claims against Lakeside and Sonoco, seeking damages in excess of $20 million. WP alleged, among other things, that the self-heating containers caused personal injury and property damage to consumers.

¶5 Lakeside was notified of the action and served on June 26, 2006. The suit alleged that Lakeside should be responsible for damages resulting from defects in its self-heating containers. Four days later, on June 30, 2006, Lakesidegave notice of the lawsuit to Liberty. Lakeside's counsel, David Krutz of Michael, Best & Friedrich (Michael Best), advised Liberty that it was "currently preparing the response pleading which is due on July 26, 2006" and "is providing notice of the Litigation and tendering it as a claim pursuant to the terms of Policy." Krutz requested that Liberty "advise us of your position as to coverage as soon as possible." On July 24, 2006, Lakeside retained Turner, Green, Afrasiabi & Arledge, LLP ("Turner Green"), as local counsel in California.

¶6 On July 25, 2006, Liberty responded to Lakeside's claim by informing Lakeside that it had initiated a coverage investigation. On September 14, 2006, approximately two and one-half months after the initial tender, Liberty informed Lakeside it had accepted its duty to defend because the cross-complaint alleged damages or injury to third parties caused by products. However, Liberty reserved its rights to withdraw from the defense, and to seek reimbursement and allocation of defense costs for uncovered claims.

¶7 On September 18, 2006, Liberty assigned Lakeside's case to panel counsel, the Los Angeles law firm of Yoka and Smith, and requested that Lakeside's current representation, Michael Best, be substituted out of the case. Michael Best responded on October 12, 2006, advising that Lakeside desired to maintain its chosen counsel. On November 9, 2006, Liberty informed Lakeside that it would continue seeking to replace Lakeside's existing defense team, advising that Yoka and Smith was "approved counsel" who will adhere to Liberty's "terms and conditions." At the same time, Liberty again asserted that it reserved its rights to withdraw from the defense if the pleadings were confined to claims for which there was no potential for coverage. Liberty advised if Lakeside continued with its choice of lead counsel, Michael Best, it would be at Lakeside's own cost.

¶8 Lakeside rejected the assignment in correspondence to Liberty dated November 28, 2006, in which Krutz explained:

[I]t is Lakeside's position that because Liberty has reserved rights in this matter, Lakeside has the right to control the defense....
Over 40, 000 documents have been exchanged in discovery; numerous interviews of Lakeside's employees have taken place, numerous telephone conferences have taken place to discuss strategy with counsel for OnTech and Sonoco; discovery responses have been prepared. Lakeside would be significantly harmed if new counsel took the lead.

¶9 Responding on December 4, 2006, Liberty again asserted that it had the right to select counsel, and disagreed that Lakeside "has the right to control the defense." In an affidavit submitted on summary judgment, Lakeside's chief financial officer and vice president of administration, Denise Kitzerow, averred that Liberty's attempt to change counsel well into the litigation as well as its continued reservation to withdraw its defense caused Lakeside "great concern."

¶10 During this time, Lakeside continued to pay all of the costs and attorney fees in the underlying litigation. Russell Schmidt, Lakeside's chief financial officer and vice president of finance, testified that in order to obtain some participation from Liberty as to the cost of defense, the parties discussed a fee arrangement.

¶11 On December 8, 2006, Liberty and Lakeside attended mediation in the underlying litigation. Following the mediation, the parties discussed a fee arrangement whereby Liberty would pay $135 per hour towards Turner Green's counsel fees, however, a final agreement was not reached that day.

¶12 Through subsequent phone conversations and voice messages between Schmidt and Liberty senior technical claims specialist, Michael Baker, which were documented by Baker in Liberty's internal claim file notations, the parties purportedly reached an arrangement for Liberty to pay a portion of Lakeside's fees to Turner Green. The record reflects that on December 12, 2006, Liberty contacted Lakeside and discussed allowing Lakeside to retain Turner Green if they would agree to Liberty's panel counsel fee schedule. The next day, Liberty contacted Turner Green which rejected what would have been a large decrease in their normal fee schedule. The file notations indicate that Turner Green proposed to Liberty that Liberty pay $135 per hour and Lakeside pay the difference. Then, on December 13, 2006, Liberty left Lakeside a message detailing Turner Green's proposal. Lakeside responded to Liberty's message on December 20, 2006, agreeing to the fee arrangement and reiterating that it would continue to retain Michael Best as lead counsel. Liberty then informed Turner Green of the discussions. The parties disagree whether this was an "understanding" or an "agreement," and whether it was final or temporary, but nonetheless, Liberty paid this hourly rate through the settlement of the case.

¶13 In Liberty's internal notations from December 21, 2006, Baker summarizes the agreement as follows:

We have finally, I believe, reached an agreement with the defense: The [insured] will continue to retain the Michael Best firm/David Krutz as lead counsel. They will do this at their cost. We have agreed to retain the Turner Green firm (who the [insured] would like to keep on) as local counsel. They will agree to split their billing, meaning we will pay fees and costs to $135 per hour and [insured] will then be responsible for the difference.

However, Liberty's internal notations on December 20, 2006, also indicate that it was informed by Lakeside that it would "be getting something in writing from Mr. Krutz." Baker also noted that, "once confirmed," he would contact Turner Green to finalize details. The next day, on December 21, 2006, Baker sent an email toanother Liberty employee asking for approval of the retention of Turner Green. It is undisputed that no written agreement exists as to the payment of attorney fees.

¶14 On January 25, 2007, Krutz sent a letter to Liberty acknowledging that Liberty had agreed to pay a portion of Turner Green's fees but asserted that Liberty was obligated to pay the full cost of defense. On February 7, 2007, Liberty responded to Lakeside by sending a letter outlining the previous fee arrangement and stating their disagreement with Lakeside's position. Despite its assertion that the defense issue had been resolved, Liberty reiterated its reservation of rights to seek allocation or reimbursement of defense costs for uncovered claims.

¶15 On August 31, 2007, the parties to the...

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