Meadowbrook, Inc. v. Tower Ins. Co., Inc.

• Decision Date: 06 February 1997
• Docket Number: No. C6-95-1285,C6-95-1285
• Citation: 559 N.W.2d 411
• Parties: 134 Lab.Cas. P 58,275 MEADOWBROOK, INC., et al., v. TOWER INSURANCE COMPANY, INC., petitioner, Appellant.
• Court: Minnesota Supreme Court

Page 411

559 N.W.2d 411

134 Lab.Cas. P 58,275

MEADOWBROOK, INC., et al., v. TOWER INSURANCE COMPANY, INC., petitioner, Appellant.

No. C6-95-1285.

Supreme Court of Minnesota.

Feb. 6, 1997.

Rehearing Denied March 18, 1997.

Syllabus by the Court

1. An insurer who assumes an insured's total defense of a multi-claim lawsuit under a reservation of rights can withdraw from the entire defense once all arguably covered claims have been resolved with finality.

2. A single claim within a multi-claim lawsuit is resolved with finality upon settlement or an express direction for the entry of judgment in accordance with Minn. R. Civ. P. 54.02.

3. Because hostile work environment sexual harassment under the Minnesota Human Rights Act results in an injury to the working relationship, such claims necessarily fall within the exclusion for claims arising out of and during the scope of employment.

Stapleton, Nolan & McCall, P.A., Mark Nolan, James T. Hynes, St. Paul, for appellant.

Mansfield & Tanick, P.A., Marshall H. Tanick, Teresa J. Ayling, Minneapolis, for respondents.

Meagher & Geer, P.L.L.P., William H. Hart, R.D. Blanchard, Minneapolis, for amicus curiae.

Heard, considered and decided by the court en banc.

OPINION

TOMLJANOVICH, Justice.

This is an appeal from a determination in a declaratory judgment action that the Tower Insurance Company, Inc. (hereinafter "insurer") had a duty to defend Meadowbrook, Inc., and its president and sole shareholder, S. Bruce Lansky (hereinafter "insured"), against a multi-claim lawsuit filed by four Meadowbrook employees in January 1991. The trial court entered four judgments totalling $228,834.13 to cover the insured's costs for both defending the underlying action and prosecuting the declaratory judgment action from March 26, 1992 until January 4, 1995. The insurer appealed all four judgments to the court of appeals, which affirmed the trial court's determination of the insurer's duty to defend and the first three judgments, but reversed and remanded for modification of the final judgment. Meadowbrook, Inc. v. Tower Ins. Co., Inc., 543 N.W.2d 418 (Minn.App.1996). We reverse all four judgments and hold that the insurer's duty to defend the underlying action ceased upon the February 22, 1993 settlement of the defamation claims in the underlying action. In addition, we hold that the insurer must reimburse the insured only for those legal fees incurred in both defending the underlying action and prosecuting the declaratory judgment action prior to the settlement of the defamation claims on February 22, 1993.

Four Meadowbrook employees filed a claim in January 1991 against insured asserting, among other things, sexual harassment and defamation. ¹ The insurer admitted that the defamation claims were arguably covered by the general business liability policy held by the insured, and assumed defense of the entire claim under a reservation of rights. The insurer retained the law firm of Jardine, Logan & O'Brien for the defense of the underlying action and suggested that the insured retain its own counsel to help it defend the uninsured claims. The insured retained the law firm of Mansfield & Tanick. The trial court in the underlying action on March 20, 1992 dismissed, among other things, the defamation claims. ² The insurer withdrew its defense of the entire action 10 days later, and the insured, through Mansfield & Tanick, brought a declaratory judgment action on May 4, 1992.

The insurer, through the law firm of Stapleton, Nolan & McCall, moved for summary judgment in the declaratory judgment action, claiming its duty to defend the underlying action had ceased because the dismissal of the defamation claims left no claims upon which the policy arguably applied. The trial court denied the motion on the grounds that the dismissal of the defamation claims was not final under Minn. R. Civ. P. 54.02, ³ and subsequently entered judgment against the insurer for $79,153.58, the fees incurred by Mansfield & Tanick in defending the underlying action and prosecuting the instant action from March 26, 1992 until January 31, 1993. The insurer settled, among other things, the defamation claims with the plaintiffs in the underlying action on February 22, 1993 ⁴ and moved again for summary judgment in the declaratory judgment action, claiming that the settlement rendered the dismissal of the defamation claims final within the meaning of Minn. R. Civ. P. 54.02. The trial court denied the motion, stating that even if the settlement of the defamation claims had rendered the dismissal final, the insurer's duty to defend continued because the remaining claims for sexual harassment, reprisal and Whistleblower Act ⁵ violations were arguably within the policy's coverage.

The trial court entered judgment for $23,264.13, the fees incurred by Mansfield & Tanick in defending the underlying action and prosecuting the instant action from February 1, 1993 until April 30, 1993. The insurer appealed the judgment to the court of appeals, but the court dismissed the claim as premature pending final judgment on the indemnity issue. The insured on December 20, 1993 received a third judgment for $32,169.92, the amount of fees incurred by Mansfield & Tanick in defending the underlying action and prosecuting the instant action from May 1, 1993 until September 30, 1993. The insurer moved for a stay of judgment, but the trial court denied the motion and both the court of appeals and this court denied review. The insurer paid $137,171.63 ⁶ to satisfy the three judgments.

Two of the plaintiffs in the underlying action advanced to trial in January 1994 ⁷ and received verdicts of $136,500 against the insured on claims for hostile work environment sexual harassment. ⁸ The insured subsequently settled the claims. The trial court in the instant action ruled on January 4, 1995 that the insurer had no duty to indemnify the insured for damages paid to any of the four plaintiffs. The court also ruled that the insurer's duty to defend never ceased, and subsequently entered a fourth judgment against the insurer for $94,246.50, the fees incurred by Mansfield & Tanick in defending the underlying action and prosecuting the instant action from May 1, 1993. The court of appeals affirmed the trial court on the issue of the insurer's duty to defend and affirmed the first three judgments, but reversed and remanded part of the final judgment, stating that the insurer's duty to defend did not extend to the fees incurred by the insured in seeking indemnification.

The insurer admits that the defamation claims in the underlying action obligated it to defend all claims against the insured. The insurer argues, however, that once the defamation claims were dismissed by partial summary judgment, its obligation to defend ceased because none of the remaining claims arguably fell within the scope of the policy's coverage. Although the trial court eventually determined that all remaining claims fell outside the policy's coverage for the purpose of indemnification, ⁹ the insured argues that the duty to defend continued because the insurer assumed defense of the entire claim and could not as a matter of law unilaterally abandon the defense without court approval. In the alternative, the insured argues that the duty to defend did not cease because the remaining claims arguably were within the policy's coverage.

I.

On appeal from summary judgment, this court must determine whether any genuine issues of material fact exist. Offerdahl v. University of Minn. Hosps. & Clinics, 426 N.W.2d 425, 427 (Minn.1988). Interpretation of an insurance policy is a question of law. Iowa Kemper Ins. Co. v. Stone, 269 N.W.2d 885, 886-87 (Minn.1978).

An insurer's duty to defend an insured is contractual. Inland Const. Corp. v. Continental Cas. Co., 258 N.W.2d 881, 883 (Minn.1977) (citing Bituminous Cas. Corp. v. Bartlett, 307 Minn. 72, 75, 240 N.W.2d 310, 312 (1976)). The duty to defend is broader than the duty to indemnify. St. Paul Fire & Marine Ins. Co. v. Lenzmeier, 309 Minn. 134, 139, 243 N.W.2d 153, 156 (1976). Such a duty to defend generally covers those claims that arguably fall within the scope of the policy. Inland Const. Corp., 258 N.W.2d at 884 (citing Christian v. Royal Ins. Co., 185 Minn. 180, 240 N.W. 365 (1932)). In determining the existence of such a duty, a court will compare the allegations in the complaint in the underlying action with the relevant language in the insurance policy. Ross v. Briggs and Morgan, 540 N.W.2d 843, 847 (Minn.1995) (citing Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 390 (Minn.1977)).

Both the trial court and the insured correctly asserted that no Minnesota appellate court has ruled on the ability of an insurer to unilaterally withdraw its defense following the dismissal of all coverable claims. At least two cases, however, have dealt with the issue of withdrawal, and in neither case did this court or the court of appeals state that an insurer could not unilaterally withdraw its defense no matter the circumstances. In Crum v. Anchor Cas. Co., 264 Minn. 378, 385, 119 N.W.2d 703, 708 (1963) we held that the insurer could not withdraw after assuming the insured's defense, but only because the insurer was aware of facts that arguably placed part of the underlying claim within the policy's coverage. In Alexandra House, Inc. v. St. Paul Fire and Marine Ins. Co., 419 N.W.2d 506, 510 (Minn.App.1988), the court of appeals allowed an insurer to withdraw after concluding that the insurer never had a duty to defend. Although neither case is directly on point, both indicate by their analyses that an insurer's duty to defend is not an interminable one. ¹⁰ As we stated in Crum:

In most cases * * * it will not be difficult for the insurer to compel the injured party to disclose whether the injury is within the policy; and, if it transpires that it is not, the insurer need go on no longer.

Crum, 264 Minn. at 390, 119 N.W.2d at 711 (quoting Lee...