Sanderson v. Ohio Edison Co.

• Decision Date: 20 July 1994
• Docket Number: No. 93-873,93-873
• Citation: 69 Ohio St.3d 582,635 N.E.2d 19
• Parties: SANDERSON, Appellant, v. OHIO EDISON COMPANY et al.; Ohio Farmers Insurance Company, Appellee.
• Court: Ohio Supreme Court

Page 582

69 Ohio St.3d 582

635 N.E.2d 19

SANDERSON, Appellant, v. OHIO EDISON COMPANY et al.; Ohio Farmers Insurance Company, Appellee.

No. 93-873.

Supreme Court of Ohio.

Submitted April 5, 1994.

Decided July 20, 1994.

SYLLABUS BY THE COURT

1. An insurance policy which states that the insurer is obligated to defend in any action seeking damages payable under the policy against the insured, even where the allegations are groundless, false or fraudulent, imposes an absolute duty upon the insurer to assume the defense of the action where the complaint states a claim which is partially or arguably within policy coverage.

2. By unjustifiably refusing to defend an action, the insurer voluntarily forgoes the right to control the litigation and the insured may make a reasonable settlement without prejudice to the insured's rights under the insurance policy.

3. In determining whether an injury arose from the use of an automobile, the relevant inquiry is whether the chain of events resulting in the accident was unbroken by the intervention of any event unrelated to the use of the vehicle. (Kish v. Cent. Natl. Ins. Group of Omaha [1981], 67 Ohio St.2d 41, 21 O.O.3d 26, 424 N.E.2d 288, followed.)

4. An automobile is not furnished for the regular use of an insured where the insured has only occasional possession of the automobile, which does not exceed ten occasions in one year.

On February 13, 1982, plaintiff-appellant, Johnnie Sanderson, was injured when she was hit by a truck started by Dale Allen, the ten-year-old son of Judith and Thomas Allen. The truck was owned by defendant-appellee, Ohio Edison Company, the employer of Thomas Allen, who had driven it to a dinner party while accompanied by appellant and Dale Allen. Mr. Allen was in possession of the vehicle because he was acting as a substitute foreman that weekend. The injury occurred when Dale, who was unfamiliar with a standard transmission, started the truck at the same time appellant walked in front of it. The vehicle lurched forward, pinning appellant between the truck and another parked vehicle.

Appellant filed an action against Dale Allen and Judith Allen, who impleaded Ohio Edison and Thomas Allen, Judith's former husband. Appellant alleged in her amended complaint that Dale Allen had negligently operated the truck, that his parents had negligently encouraged and taught him to operate motor vehicles, and that her injuries were the direct and proximate consequence of the Allens' joint negligence.

The Allens were insured by separate automobile liability insurance policies issued by appellee, Ohio Farmers Insurance Company. The policies are identical in coverage terms except for the monetary limits of liability.

The insurer was given notice of the suit, but took the position that coverage was not available under the policies, and therefore refused to defend the suit or participate in any settlement negotiations. The Allens settled the claim, on the day set for trial, by admitting liability and allowing the court to determine the amount of damages. In return, plaintiff agreed not to seek collection from the Allens but, rather, to seek satisfaction of the judgment from insurance proceeds.

The Ottawa County Court of Common Pleas found the Allens negligent and awarded damages in the amount of $79,000 by judgment entry dated September 18, 1985.

Plaintiff subsequently filed a supplemental complaint, pursuant to R.C. 3929.06, naming Ohio Edison and three insurers, including Ohio Farmers, as defendants. The other insurers, homeowner insurers, were later dismissed from the action on the basis of policy language that excluded coverage for bodily injury arising out of the ownership, maintenance, or use of a motor vehicle, leaving only Ohio Farmers as an insurer in the action.

On May 23, 1988, the trial court granted plaintiff's motion for summary judgment, finding that coverage existed under the insurer's policies. The court of appeals reversed and remanded, concluding that genuine issues of material fact existed on the issue of whether the vehicle was available for Thomas Allen's regular use, whether the truck was a private passenger automobile, and whether Dale Allen had permission of the owner to start the truck. Sanderson v. Ohio Farmers Ins. Co. (June 2, 1989), Ottawa App. No. OT-88-31, unreported, 1989 WL 57616.

The trial court found, on remand, that the policies provided coverage and ordered the insurer to pay $79,000, plus interest. On appeal, the judgment was reversed on the sole ground that, by not seeking the assent and participation of the insurer before entering into the settlement agreement, an express condition contained in the policies, the Allens had breached the contract and eliminated their right to coverage under the policies, thereby precluding plaintiff from recovery. The other assignments of error were deemed moot and were not addressed, under authority of App.R. 12(A)(1)(c).

The policies contain the following coverage provision regarding the insurer's duty to defend:

"[T]he company shall defend any suit alleging such bodily injury or property damage and seeking damages which are payable under the terms of the policy, even if any of the allegations of the suit are groundless, false or fraudulent * * *."

The dissenting judge in the court of appeals opined that the insurer had materially breached the contract by refusing to honor its duty to defend the Allens and, consequently, could not invoke those policy conditions relied upon by the majority to preclude plaintiff from recovery on the judgment.

This cause is now before this court upon the allowance of a motion to certify the record.

Murray & Murray, W. Patrick Murray and Steven C. Bechtel, Sandusky, for appellant.

Jones & Bahret Co., L.P.A., Robert J. Bahret and Keith J. Watkins, Toledo, for appellee.

ROBERT A. NADER, Justice.

Plaintiff argues that the insurer breached its contractual duty to defend, that this breach effected a waiver of the conditions relied upon by the insurer, and that the court of appeals erred in its conclusion that the Allens were required to file a declaratory judgment action in response to the insurer's refusal to defend. The insurer contends, in its first and second propositions of law, that its duty to defend was not automatically invoked by the plaintiff's allegations of negligence stated in her pleadings, and that its incorrect determination not to defend did not result in a waiver of the insureds' obligation to comply with all the conditions contained in the policies. The insurer asserts, in its third proposition of law, that, absent an assignment or other contractual right, a judgment creditor does not have standing in a supplemental proceeding to claim that the insurer waived policy conditions by failing to defend its insureds in the underlying action. On cross-assignments of error, the insurer argues in its fourth and fifth propositions of laws that, even if this court concludes that plaintiff's arguments are meritorious, the negligence agreed upon in the underlying action is not covered under the policies, and that the truck in issue is not a covered, "non-owned" vehicle within the terms of the policies. For the reasons set forth below, this court concludes that the court of appeals erred in reversing the judgment of the trial court.

Generally, an insurer in a supplemental proceeding under R.C. 3929.06 has available to it any defense arising from the insured's failure, in the underlying action, to satisfy conditions in the insurance policy which are a prerequisite to indemnification. See Bennett v. Swift & Co. (1959), 170 Ohio St. 168, 10 O.O.2d 109, 163 N.E.2d 362; Miller v. Jones (1942), 140 Ohio St. 408, 24 O.O. 415, 45 N.E.2d 106. In the present case, the policies contain the following condition:

"No action shall lie against the company * * * until the amount of the insured's obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company."

The parties agreed that the insureds did not comply with this condition.

In Willoughby Hills v. Cincinnati Ins. Co. (1984), 9 Ohio St.3d 177, 9 OBR 463, 459 N.E.2d 555, this court held in the syllabus:

"Where the insurer's duty to defend is not apparent from the pleadings in the action against the insured, but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must accept the defense of the claim."

The policies in issue unambiguously state that the insurer has the obligation to defend any action against the insured seeking damages payable under the policies "even if any of the allegations of the suit are groundless, false or fraudulent." This language imposes upon the insurer the absolute duty to assume the defense of the action where the underlying tort complaint states a claim which is potentially or arguably within the policy coverage. Id. Cf. Preferred Risk Ins. Co. v. Gill (1987), 30 Ohio St.3d 108, 30 OBR 424, 507 N.E.2d 1118, paragraph two of the syllabus. It is clear that the allegation set forth in plaintiff's complaint presented a claim which was potentially or arguably within the coverage of the policies.

"The duty to defend is of great importance to both the insured and the insurer." Gen. Acc. Ins. Co. v. Ins. Co. of N. Am. (1989), 44 Ohio St.3d 17, 21, 540 N.E.2d 266, 271. Thus, the insurer's failure to honor that obligation constitutes a material breach of the contract. This material breach relieves the insured of the duty to seek the insurer's assent to and participation in a proposed settlement.

In Hartford Acc. & Indemn. Co. v. Randall (1932), 125 Ohio St. 581, 183 N.E. 433, at paragraph three of the syllabus, this court held the following with respect to a provision requiring notice of suit:

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