Professional Office Bldgs., Inc. v. Royal Indem. Co.

• Decision Date: 23 June 1988
• Docket Number: No. 87-2078,87-2078
• Citation: 145 Wis.2d 573,427 N.W.2d 427
• Parties: PROFESSIONAL OFFICE BUILDINGS, INC., a Wisconsin corporation, Eleanor Touchett, Personal Representative of the Estate of A.L. Touchett, as Assignee of Touche Leasing Corporation, a Delaware corporation, James C. George and Audrey George, individually and as assignees of Professional Office Buildings, Inc., Touche Leasing Corporation, and Eleanor Touchett, Personal Representative of the Estate of A.L. Touchett, Plaintiffs-Appellants, v. ROYAL INDEMNITY COMPANY, Defendant-Respondent.
• Court: Wisconsin Court of Appeals

Page 427

427 N.W.2d 427

145 Wis.2d 573

PROFESSIONAL OFFICE BUILDINGS, INC., a Wisconsin corporation, Eleanor Touchett, Personal Representative of the Estate of A.L. Touchett, as Assignee of Touche Leasing Corporation, a Delaware corporation, James C. George and Audrey George, individually and as assignees of Professional Office Buildings, Inc., Touche Leasing Corporation, and Eleanor Touchett, Personal Representative of the Estate of A.L. Touchett, Plaintiffs-Appellants, v. ROYAL INDEMNITY COMPANY, Defendant-Respondent.

No. 87-2078.

Court of Appeals of Wisconsin.

Submitted on Briefs April 22, 1988.

Opinion Released June 23, 1988.

Opinion Filed June 23, 1988.

Review Denied.

Jon P. Axelrod, Ronald R. Ragatz, and Paul G. Kent, of DeWitt, Porter, Huggett, Schumacher & Morgan, S.C., Madison, for plaintiffs-appellants.

John H. Schmid, Jr., and Axley Brynelson, Madison (Paul W. Schwarzenbart of Lee, Johnson, Kilkelly & Nichol, S.C., of counsel), Madison, for defendant-respondent.

Before GARTZKE, P.J., and DYKMAN and EICH, JJ.

EICH, Judge.

Professional Office Buildings, Inc. (POB), and other parties appeal from a summary judgment dismissing their complaint against the Royal Indemnity Company. POB, the owner of two liability policies issued by Royal, ¹ sued to obtain coverage for its liability to a third party as determined in a Mississippi lawsuit. The issues are: (1) whether an insurer's duty to defend its insured is determined solely by the allegations of the complaint, or whether extrinsic facts may be considered; (2) the appropriate rate of interest to be applied to the Mississippi judgment; and (3) whether the trial court erred in dismissing POB's "bad faith" claim against Royal. We conclude that the allegations of the complaint determine the insurer's duty to defend, and that Royal breached that duty when it refused to defend POB in the Mississippi action. We also conclude that the eight percent interest rate provided in the Mississippi judgment is applicable, even though the judgment was also docketed in Wisconsin, and that the trial court did not err in dismissing the bad faith claim. We therefore affirm in part and reverse in part.

The facts are not in dispute. On December 11, 1972, an airplane owned by POB, a Wisconsin corporation, crashed near Tupelo, Mississippi, seriously and permanently injuring a passenger, James George. At the time of the crash, POB had leased the plane to K.B.C., Inc., another Wisconsin company. K.B.C. was in the business of arranging charter flights and paid POB a portion of the revenue it earned from the charters. George was an employee of a company that had chartered the plane to transport goods from Wisconsin to Mississippi.

Two liability policies are at issue: an "Airshield Aircraft Policy" providing $3,000,000 coverage and a "Comprehensive Catastrophe Liability Policy," also called a "Big Shield" policy, which provided $1,000,000 of general liability coverage.

The body of the "Airshield" policy states that it does not apply if "the aircraft is used for any purpose ... for which a charge is made to others." However, there is an "air taxi" endorsement to the policy under which Royal agrees to pay "all sums which the Named Insured shall become legally obligated to pay as damages for bodily injury ... resulting from the Named Insured's negligent operation, maintenance or use of aircraft in 'air transportation'...."

The "Big Shield" policy protects the insured against damages because of "[p]ersonal [i]njury ... anywhere in the world." While the policy excludes liability resulting from use of aircraft, there is an exception to the exclusion for "liability arising out of operations performed by independent contractors."

George sued POB in Mississippi, claiming that POB was engaged in "operation of aircraft" under Mississippi law and thus was vicariously liable for the pilot's negligence. In Mississippi, anyone who causes or authorizes another to operate an aircraft is deemed to be engaged in the "operation of aircraft" and is liable for the pilot's negligence. ² A second cause of action contended that POB was liable for negligence as a common carrier, and a third sought punitive damages.

Royal refused to defend the action, denying coverage on grounds that: (1) at the time of the accident, the aircraft was being used for a purpose for which a charge was made to others contrary to the stated declarations of the Airshield policy; and (2) the Big Shield policy did not apply because of the aircraft exclusion.

Prior to trial of the Mississippi action, POB ran out of funds to pay its attorney, and the company's owner, A.L. Touchett, appeared pro se at the start of the trial, but put on little, if any, defense. Following trial, the Mississippi court entered judgment against POB for $4,487,249.22. POB's liability was based on the provisions of Mississippi law imputing the negligence of the pilot to all parties authorizing operation of the aircraft. The judgment was later docketed in Wisconsin.

POB then filed this Wisconsin action against Royal, seeking to recover the policy limits on both the Airshield and Big Shield policies. The complaint stated causes of action for damages based on Royal's breach of its duty to defend the Mississippi action, for indemnity under the policies, and for bad faith. George and his wife joined the action as plaintiffs. Royal moved for summary judgment, claiming that there was no coverage under either policy, and POB filed a cross-motion for summary judgment on its complaint. The trial court denied POB's motion and granted Royal's. Judgment dismissing the complaint was entered on October 21, 1987.

Because the trial court's rulings--that there was no duty to defend, and no coverage under either policy, and that the bad faith claim was barred by the statute of limitations--involve questions of law only, we review them independently, without deference to the trial court's decision. First Nat. Leasing Corp. v. Madison, 81 Wis.2d 205, 208, 260 N.W.2d 251, 253 (1977).

I. THE DUTY TO DEFEND

Generally, an insurer has the obligation to defend its insured against a lawsuit if the complaint "alleges facts which, if proven, would give rise to liability covered under the terms and conditions of the policy." Sola Basic Ind. v. U.S. Fidelity & Guaranty Co., 90 Wis.2d 641, 646, 280 N.W.2d 211, 213 (1979). The trial court, in a thorough, well-written opinion, concluded that its inquiry was not limited to the four corners of the complaint, but that the duty to defend--or the absence thereof--could be determined by looking beyond that document to extrinsic facts known to the insurer.

The source of that view is a federal district court case, American Motorists Ins. Co. v. Trane Co., 544 F.Supp. 669, 679 (W.D.Wis.1982), aff'd 718 F.2d 842 (7th Cir.1983). However well-reasoned that case might be, where Wisconsin Supreme Court precedent--or our own--requires a contrary result, we are bound by that precedent. And that is the case here, for we believe the rule of Grieb v. Citizens Casualty Co., 33 Wis.2d 552, 148 N.W.2d 103 (1967), and similar cases, is controlling and compels the determination that the duty to defend is dependent solely on the allegations of the complaint, and that, in this case, the duty was clear. While we believe the federal court's analysis in American Motorists is persuasive, we are bound by Wisconsin Supreme Court precedent regardless of the extent of our agreement, or our disagreement, with it. State ex rel. McCaffrey v. Shanks, 124 Wis.2d 216, 221, 369 N.W.2d 743, 747 (Ct.App.1985).

In Grieb, the supreme court held that, in determining the duty to defend, "[i]t is the nature of the claim alleged against the insured which is controlling even though the suit may be groundless, false or fraudulent." Id., 33 Wis.2d at 558, 148 N.W.2d at 106 (emphasis added). In a later case, Smith v. State Farm Fire & Cas. Co., 127 Wis.2d 298, 301, 380 N.W.2d 372, 374 (Ct.App.1985), the underlying action had been settled after extensive discovery had taken place, and the insurer argued that in order to determine its duty to defend the action, "we must go beyond the pleadings" and "look to depositions and other discovery materials, and to the terms of the settlement agreement itself, rather than limit our inquiry to the allegations of the complaint." We rejected the argument, stating that "[t]he rule of Grieb has been consistently followed in Wisconsin," citing Sola Basic, supra, and Gerrard Realty Corp. v. American States Ins. Co., 89 Wis.2d 130, 141, 277 N.W.2d 863, 869 (1979). Smith, 127 Wis.2d at 301-02, 380 N.W.2d at 374. We concluded that the insurer's duty to defend was to be "determined by the nature of the claim stated in the ... complaint, despite the availability of later depositions and other discovery materials in the action...." Id. at 299, 380 N.W.2d at 373.

Most recently, in Nichols v. American Employers Ins. Co., 140 Wis.2d 743, 747, 412 N.W.2d 547, 549 (Ct.App.1987), we noted that "Sola Basic [which was based on Grieb ] teaches that the obligation to defend is to be determined by the allegations in the complaint." In Nichols, the insured, Charles Nichols, claimed that his insurer had a duty to defend him in a sexual harassment action brought by one of his employees before the Department of Industry, Labor and Human Relations. Nichols' policy provided coverage for defamation claims, and it was undisputed that the DILHR complaint contained no allegations of defamation. Nichols argued, however, that because the tender of defense he sent to the insurer included a copy of a DILHR hearing examiner's report quoting certain employees under his control as using "sexist, vulgar term[s]" to describe the suing employee, those extraneous facts gave the insurer adequate notice that the claim involved defamation, and therefore the insurer had a duty to defend him in the proceedings. Id., 140 Wis.2d at 748, 412 N.W.2d at 550. We rejected the argument,...