Newhouse v. Citizens Sec. Mut. Ins. Co.

• Decision Date: 06 July 1992
• Docket Number: No. 91-1802,91-1802
• Parties: Robert C. NEWHOUSE, by his Guardian ad Litem, Ardell W. Skow, Charles E. Newhouse and Bonnie Newhouse, Plaintiffs-Respondents-Cross-Appellants, d ]]] v. CITIZENS SECURITY MUTUAL INSURANCE COMPANY, Defendant-Third-Party Plaintiff-Appellant-Cross-Respondent, dd Floyd Omann, Don Paul Novitzke and XYZ Insurance Company, Third-Party Defendants. . Oral Argument
• Court: Wisconsin Court of Appeals

Page 639

489 N.W.2d 639

170 Wis.2d 456

Robert C. NEWHOUSE, by his Guardian ad Litem, Ardell W Skow, Charles E. Newhouse and Bonnie Newhouse Plaintiffs-Respondents-Cross-Appellants,^d]]] v. CITIZENS SECURITY MUTUAL INSURANCE COMPANY Defendant-Third-Party Plaintiff-Appellant-Cross-Respondent,^dd Floyd Omann, Don Paul Novitzke and XYZ Insurance Company Third-Party Defendants.

No. 91-1802.

Court of Appeals of Wisconsin.

Oral Argument July 6, 1992.

Opinion Released Aug. 4, 1992.

Opinion Filed Aug. 4, 1992.

On behalf of plaintiffs-respondents-cross-appellants, the cause was submitted on the briefs of Lila M. Hambleton, Ardell W. Skow and Matthew A. Biegert of Doar, Drill & Skow, S.C. of Baldwin, and orally argued by Matthew A. Biegert.

On behalf of defendant-third-party plaintiff-appellant-cross-respondent, the cause was submitted on the briefs of and orally argued by Terrence M. Gherty of Gherty & Gherty, S.C. of Hudson.

Before CANE, P.J., and LaROCQUE and MYSE, JJ.

LaROCQUE, Judge.

Citizens Security Mutual Insurance Company appeals a summary judgment holding that it breached its duty to defend its insured, Floyd Omann. The judgment awards Floyd's assignee, Robert Newhouse, over $724,000, the amount of the judgment against Floyd in an underlying personal injury action. The judgment also awards costs and fees for frivolous claims Citizens filed seeking contribution against Floyd and his attorney. In a previous appeal arising out of the personal injury action, this court held that Floyd had coverage under Citizens' $50,000 homeowner's liability policy. Newhouse v. Laidig, Inc., 145 Wis.2d 236, 426 N.W.2d 88 (Ct.App.1988) (Newhouse I ). Robert cross-appeals the dismissal of his bad faith claims.

Citizens maintains that: (1) despite Newhouse I, it had no duty to defend because it had an independent and unappealed declaratory judgment from the circuit court holding that Floyd did not have coverage; (2) Floyd's assignee is also barred from reliance upon Newhouse I because Floyd failed to join in that appeal; (3) alternatively, if it did breach a contractual duty to defend, the proper measure of damages is the $50,000 policy limits plus interest and costs of defense, rather than the entire personal injury judgment; and (4) Citizens' contribution claims against Floyd and his attorney were not frivolous. We hold that (1) Citizens is bound by our decision in Newhouse I; (2) the measure of damages for breach of the insurer's duty to defend This lawsuit is the aftermath of a negligence action brought by the young nephew of Citizens' insured. Four-year-old Robert Newhouse was injured in a farm accident when his uncles, Timothy and Floyd Omann, permitted the youngster into a silo where he became entangled in unloader machinery. Citizens insured Floyd and his parents with a homeowner's policy. Although the insured parties did not live on the farm where the accident happened, Floyd was at the farm helping Timothy at the time of the accident.

is the policy limits plus interest together with costs and attorney fees in defending the suit; (3) Citizens' claims for contribution were frivolous and costs were properly imposed; and (4) Robert's bad faith claims were properly dismissed.

The legal chronology leading to this appeal is complex. Robert first commenced a lawsuit against the Omann brothers and others for their alleged negligence in the farm accident. Citizens was not initially a named defendant. Attorney Don Paul Novitzke filed an answer for Floyd denying liability and then tendered the defense to Citizens. Citizens responded with a separate action naming Floyd as the only defendant, seeking a declaratory judgment that its homeowner's policy excluded coverage because the accident did not occur on the insured's premises. Before the circuit court could rule, Robert joined Citizens in his negligence lawsuit and Citizens raised the issue of coverage in that action as well. The same trial judge presided over both actions. A declaratory judgment holding that Citizens' policy did not provide coverage was granted first, followed some six months later by an identical ruling in Robert's underlying negligence action. Floyd did not appeal the declaratory judgment, while the defendants in Robert's action, with the exception of Floyd, did appeal the coverage holding.

In the meantime, while the coverage appeal was pending in this court, Robert's negligence action proceeded to trial on the merits. The trial court inquired of Citizens whether it wanted a continuance pending resolution of the coverage appeal and was advised in the negative. Citizens assumed Floyd was represented by counsel and that counsel was aware of the offer for an adjournment. Neither Floyd nor Citizens participated in the personal injury trial. ¹ During the course of his trial, Robert separately settled each of his tort claims except the one against Floyd. The trial court excused the jury, and Robert's claim against Floyd was tried to the court, without participation by Floyd or Citizens. The trial court apportioned negligence 35% to Floyd, 35% to Timothy and the remaining 30% to various machinery manufacturers. Total damages were assessed in that action at more than $1 million, and Floyd's 35% portion was approximately $576,000. Judgment against Floyd was entered against him in October 1987.

Thereafter, this court reversed the trial court's denial of coverage in Newhouse I. We held that Citizens' policy provided floating coverage for Floyd's tortious personal acts wherever he might be, and that the policy exclusions did not apply. Id. 145 Wis.2d at 240, 246 N.W.2d at 90.

After our decision, Citizens paid its policy limits of $50,000 together with $77,000 interest and costs into the St. Croix County clerk of court's office pending resolution of its petition for review to the Wisconsin Supreme Court, which was eventually denied. Citizens also paid Floyd's attorney fees incurred to that point.

Floyd thereafter assigned any claims he may have against Citizens to his nephew, Robert, the original plaintiff. An assignee of a cause of action stands in the shoes of, and acquires no greater rights than were possessed by, the assignor. Callies v. Reliance Laundry Co., 188 Wis. 376, 381, 206 N.W. 198, 200 (1925). Pursuant to that assignment, Robert commenced this action alleging several causes of action, including tortious bad faith and breach of the contractual duty to defend.

The trial court dismissed all the claims except the breach of a duty to defend in a summary judgment. Citizens also filed third-party claims for contribution against Floyd and Novitzke, alleging that their negligence in failing to defend in Robert's lawsuit increased the damages against Floyd. Both sides alleged that the others' claims were frivolous.

The trial court granted summary judgment on the breach of contract claim against Citizens for failing to defend Floyd and awarded damages in the sum of $724,004.02, representing the damages awarded in the underlying personal injury action together with interest and costs. The court also found that Citizens' contribution claims against Floyd and his attorney were frivolous and awarded actual costs and attorney fees. According to Citizens' brief, issues concerning counterclaims by Floyd and his attorney for frivolous costs against Citizens remain pending in the trial court.

DUTY TO DEFEND FLOYD

Citizens contends that its obligation to defend its insured terminated because Floyd failed to appeal the coverage ruling, first after the declaratory judgment and later from the same ruling in Robert's negligence action. ² When reviewing a grant of summary judgment, we apply the same methodology as the circuit court, and, because the procedure has been set forth in numerous cases such as Grams v. Boss, 97 Wis.2d 332, 294 N.W.2d 473 (1980), we do not repeat it here. Questions of law are properly decided by summary judgment. Kane v. Employer's Ins., 142 Wis.2d 702, 705, 419 N.W.2d 324, 326 (Ct.App.1987).

We conclude as a matter of law that neither res judicata nor collateral estoppel allows Citizens to avoid this court's coverage ruling in Newhouse I. These doctrines are equitable in nature and founded upon principles of fundamental fairness. Desotelle v. Continental Cas. Co., 136 Wis.2d 13, 21, 400 N.W.2d 524, 527 (Ct.App.1986).

There are several reasons why Citizens' attempt to avoid the application of Newhouse I in this lawsuit is fundamentally unfair. First, Wisconsin has long held that a separate and independent declaratory judgment action is not the proper method for resolution of insurance coverage issues. New Amsterdam Cas. Co. v. Simpson, 238 Wis. 550, 300 N.W. 367 (1941), and Allstate Ins. Co. v. Charneski, 16 Wis.2d 325, 114 N.W.2d 489 (1962). New Amsterdam recognized that Wisconsin, unlike many other jurisdictions, provides for direct action by an injured plaintiff against an insured defendant's insurer. Section 803.04(2), Stats. As a result, the injured plaintiff is subject to a defense that the defendant tortfeasor's policy does not cover the accident. "Hence, the injured party with a cause of action directly against the insurer is in a real, as well as a technical sense, the principal adversary of the insurance company upon this issue." New Amsterdam, 238 Wis. at 555, 300 N.W. at 369. Coverage questions should be resolved in the underlying personal injury lawsuit.

Furthermore, not only did Citizens' declaratory judgment action contravene the holdings in New Amsterdam and Charneski, and thereby subject Floyd to multiple lawsuits and the potential for multiple appeals, their action naming Floyd as the sole defendant ignored an important provision of the Uniform Declaratory Judgments Act, sec. 806.04(11), Stats.: "When declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration...."

Finally, apart from the preceding procedural irregularities,...