Mowry v. Badger State Mut. Cas. Co.

• Decision Date: 30 May 1986
• Docket Number: No. 84-1635,84-1635
• Citation: 385 N.W.2d 171,129 Wis.2d 496
• Parties: Bradley MOWRY, Plaintiff-Respondent, v. BADGER STATE MUTUAL CASUALTY COMPANY, a Wisconsin corporation, Defendant- Appellant.
• Court: Wisconsin Supreme Court

Page 171

385 N.W.2d 171

129 Wis.2d 496

Bradley MOWRY, Plaintiff-Respondent, v. BADGER STATE MUTUAL CASUALTY COMPANY, a Wisconsin corporation, Defendant- Appellant.

No. 84-1635.

Supreme Court of Wisconsin.

Argued Nov. 25, 1985.

Opinion Filed April 18, 1986.

Motion for Reconsideration Denied, May 30, 1986.

Steven J. Caulum, Madison, argued, for defendant-appellant; Thomas A. Lockyear, Jan A. Smokowicz and Bell, Metzner & Gierhart, S.C., on brief.

Alan M. Clack, Santa Rosa, Cal., for plaintiff-respondent.

James T. Murray, Jr., Randy S. Parlee and Peterson, Johnson & Murray, S.C., Milwaukee, for amicus curiae Wisconsin Ins. Alliance.

CECI, Justice.

This is a review of the circuit court's decision and judgment against Badger State Mutual Casualty Company (Badger State) in the amount of $159,000. In a decision filed on May 23, 1984, the circuit court for Waukesha county, Robert T. McGraw, circuit judge, held that Badger State breached its contract and committed bad faith in refusing to defend its insured and in refusing to settle the third-party claim of victim Bradley Mowry within the liability limits of an insurance policy. We reverse the judgment of the circuit court.

This case comes to us on certification from the court of appeals, district II, pursuant to section (Rule) 809.61, Stats. ¹ The issue is whether the circuit court erred in holding that Badger State breached its contract with its insured and committed the tort of bad faith in refusing to defend its insured and in refusing to negotiate a settlement within policy limits when Badger State had sought a separate trial on the issue of coverage, under section 803.04(2)(b). ² We address whether an insurer who receives and loses a separate trial on the issue of coverage and then immediately offers the policy limits under an insurance contract may be held liable for damages adjudged against its insured which exceed the liability limits of the insurance policy. We determine that, under the facts of this case, Badger State should not be held responsible for the excess judgment entered against its insured. The trial court erred in holding that Badger State breached its The historical facts of this case are undisputed. On May 3, 1975, Bradley Mowry, then age 19, was injured in an automobile accident and suffered serious bodily injury, including the amputation of part of one foot. He was a passenger in an automobile driven by Steven McCarthy. The vehicle left a roadway and collided with a bridge abutment. McCarthy's parents were insured by Badger State and had policy limits of $15,000 for damages to any one person and medical coverage up to $1,000.

contractual duty to defend and that it committed bad faith in refusing to settle Mowry's claim within its insured's policy limits.

Upon being notified of the accident, Badger State began to investigate the circumstances surrounding the accident. The claims manager for Badger State, John Graeber, concluded after reading the police report and interviewing all of the automobile's occupants that the case was one of probable liability on McCarthy's part. He also determined that the case would probably involve damages to Mowry in excess of the $16,000 policy limits.

Badger State's investigations indicated to it, however, that a question of policy coverage existed. The question revolved around the ownership of the vehicle which McCarthy was driving at the time of the accident. The insurer believed that it was unclear whether McCarthy or his parents were the true owners of the automobile involved in the accident. Its investigation disclosed that the car was titled in McCarthy's mother's name, but that McCarthy had paid for the car with his own money, did not need permission to drive the car, and had told several people at the scene of the accident that he owned the vehicle and that it was uninsured. Given these circumstances, Graeber concluded that the issue of ownership was debatable and that a serious question of coverage had arisen.

In March, 1976, ten months after the accident, Mowry filed suit against McCarthy, McCarthy's parents, Badger State, and an insurance agent. In its answer dated March 2, 1977, Badger State denied any coverage under the policy for the automobile driven by McCarthy on the date of the accident, based on its belief that the automobile was not owned by its insureds, McCarthy's parents.

On September 13, 1977, Mowry issued a formal demand of settlement for the full amount of the liability insurance coverage, $15,000. Badger State's attorney, Kurt Frauen, responded that Badger State had denied coverage under the policy, but that he would inform Badger State of the offer. Badger State did not accept the offer.

At a pretrial conference on September 26, 1977, Attorney Frauen requested that Mowry's counsel and other parties present agree to a bifurcated trial in which a determination on coverage would precede any trial on the issue of liability. In relating the events of the pretrial conference to Badger State, Attorney Frauen wrote, "Everyone seemed to feel that if the coverage issue were resolved, the rest of the case would not have to be tried." Mowry's counsel reiterated Mowry's offer of settlement on September 26, 1977, but Badger State again refused to accept it.

A subsequent stipulation and order set April 4, 1979, as the commencement date for the trial on the issue of coverage; the issues of liability and damages were to be held in abeyance until the resolution of the coverage issue. On March 12, 1979, approximately three weeks before the coverage trial, Mowry once more demanded that Badger State pay the limits of McCarthy's liability insurance policy plus $1,000 under the medical payments coverage; he set a March 23, 1979, deadline for its acceptance. Badger State's counsel in correspondence to Mowry's counsel, stated that he felt the settlement demand was contrary to the stipulation and order separating the coverage issue from the liability and damages issues: "The court has in fact bifurcated the trial ... to resolve the coverage dispute before proceeding with the plaintiff's case." Mowry's counsel responded that he believed that stipulating to a bifurcation of issues "should not in any way be construed as barring plaintiff from attempting to negotiate settlement of his entire claim."

Badger State refused Mowry's March 12 settlement offer. On April 4, 1979, the coverage issue was tried before a jury. The jury returned a verdict the next day which found that McCarthy's parents owned the vehicle in question at the time of the accident. Coverage was thereby afforded Steven McCarthy under the policy.

On April 6, 1979, Badger State offered the limits on its liability policy and medical payments coverage. On January 10, 1980, Badger State's counsel informed McCarthy that it would assume McCarthy's defense in the action. Following negotiations between counsel for Mowry and Badger State, the parties entered into a stipulation of judgment in October, 1980, thereby rendering a trial on the liability and damages issues unnecessary. The judgment was in favor of Mowry and against Badger State for $16,000 and against Steven McCarthy for $175,000. The stipulation further called for McCarthy to assign to Mowry any and all causes of action which McCarthy might have against Badger State, in satisfaction of Mowry's judgment against McCarthy. Following that stipulation and entry of judgment, Mowry, suing under McCarthy's assignment of rights, brought the present action against Badger State for bad faith and breach of contract.

The circuit court, in holding that Badger State breached its contract in refusing to defend and that it committed bad faith in refusing to negotiate a settlement, was indignant that an insurer would delay settlement negotiations until the coverage issue has been judicially determined, particularly when liability and excess damages are undisputed. The court felt that Badger State's posture of not negotiating a settlement until the determination of the coverage issue placed all the risk of an excess judgment on the insured. It found that an insurance company who refuses to defend and refuses to negotiate may not protect itself from a claim for damages in excess of policy limits by tendering the policy limits only upon losing the coverage issue of a bifurcated trial. Citing Luke v. American Family Mut. Ins. Co., 476 F.2d 1015 (8th Cir.1973), Judge McGraw stated that the proper rule should be " 'when an offer of settlement within the policy limits has been made and ignored, a good faith refusal to defend is not a valid defense to a claim in excess of the policy limits....' " Luke, 476 F.2d at 1021. The court then awarded Mowry damages in the amount of $159,000, representing the stipulated amount of liquidated damages for which Badger State would be liable in any action brought by Mowry as assignee against Badger State.

Badger State appealed. The court of appeals, in its certification memorandum, framed the issue to be whether an insurance carrier "should be held liable for damages in excess of its policy coverage where its belief that there was no coverage led it to reject" an earlier offer of settlement within the policy limits. The court noted that this particular scenario presents an unaddressed area of insurance law in this state.

The parties assert the same arguments here as they did below. Mowry states that, in refusing to negotiate a settlement and in refusing to defend McCarthy, Badger State breached contractual and fiduciary duties it owed to McCarthy. Badger State argues that it committed no bad faith in pursuing a fairly debatable coverage question within the framework of a bifurcated trial. In effect, it argues that any duty to negotiate a settlement is suspended when a bifurcated trial has been granted on a threshold issue of coverage. If it breached its contractual duty to defend, Badger State believes that damages should be limited to the liability...