State Farm Fire and Cas. Co. v. Sigman

• Decision Date: 26 October 1993
• Docket Number: No. 930067,930067
• Citation: 508 N.W.2d 323
• Parties: STATE FARM FIRE AND CASUALTY COMPANY, Plaintiff and Appellant, v. Robert SIGMAN, Defendant and Appellee, and Brett Rudolph, and Rick and Karen Rudolph, Defendants. Civ.
• Court: North Dakota Supreme Court

Page 323

508 N.W.2d 323

STATE FARM FIRE AND CASUALTY COMPANY, Plaintiff and Appellant, v. Robert SIGMAN, Defendant and Appellee, and Brett Rudolph, and Rick and Karen Rudolph, Defendants.

Civ. No. 930067.

Supreme Court of North Dakota.

Oct. 26, 1993.

Zuger Kirmis & Smith, Bismarck, for plaintiff and appellant; argued by Charles T. Edin.

Rolfson Schulz Lervick Law Offices, Bismarck, for defendant and appellee; argued by Calvin N. Rolfson.

MESCHKE, Justice.

State Farm Fire and Casualty Company appealed from the trial court's award of attorney fees to its insured in State Farm's declaratory judgment action to determine insurance coverage. We hold that State Farm is obligated under its insurance policy to pay its insured's attorney fees for defending the declaratory judgment action, and we affirm the judgment.

Robert Sigman, a high school junior, struck Brett Rudolph, a high school freshman, in a dispute over a girl. Robert's blow broke Brett's jaw. Brett and his parents sued Robert for civil damages, alleging that Robert willfully and maliciously struck Brett in the face and caused his injuries. At the time, Robert's father, Marvin Sigman, had a homeowner's liability insurance policy with State Farm. Marvin asked State Farm to defend and indemnify Robert in the Rudolphs' lawsuit. State Farm defended Robert, subject to a reservation of right to contest coverage under the policy.

State Farm brought this declaratory judgment action against Robert, as its insured, under NDCC Ch. 32-23. State Farm claimed that it was not obligated to defend or indemnify Robert for attacking Brett, because the homeowner's liability policy excluded coverage for damages caused by the insured's "willful and malicious acts" and for damages "expected or intended by an insured."

Robert retained separate counsel to represent him in the declaratory judgment action. Robert asserted that he was covered by the liability policy because his striking Brett was neither intentional nor malicious, but rather was an impulsive reaction resulting from a dyslexic learning disability that caused Robert to sometimes misinterpret what he heard and saw.

Realizing that the costs of litigating its duty to defend would be considerable, State Farm settled Rudolphs' claim against Robert for $17,429.80, and Rudolphs' lawsuit was dismissed. Then State Farm and Robert made cross motions for summary judgment in the declaratory judgment action. State Farm sought to have their action dismissed because the settlement mooted the dispute. Robert agreed that the question of coverage was moot, but argued that State Farm must reimburse his attorney fees and costs for defending the declaratory judgment action.

The trial court concluded:

[U]nder the policy involved in this case, plaintiff's declaratory judgment action caused defendants to incur attorney fees and costs in defending said action at plaintiff's request for which there is coverage under the policy.

The trial court dismissed the declaratory judgment action with prejudice and awarded Robert attorney fees, together with costs, late charges, and interest, for a total of $23,987.00. State Farm appeals.

First, State Farm asserts that the policy language is unambiguous and does not engage State Farm to pay an insured's attorney fees for defending a declaratory judgment action to determine policy coverage. Second, State Farm asserts that it would be inequitable to require it to pay Robert's attorney fees, because the declaratory judgment action was brought in good faith, and State Farm had good reason to believe that the policy exclusion for willful and malicious acts precluded coverage of Robert's attack on Brett.

No one accuses State Farm of bad faith for seeking a declaratory judgment on policy coverage. State Farm obviously acted in good faith by defending Robert while the coverage question was open. However, State Farm had the option of having the court resolve the coverage question, even after it settled the Rudolphs' claim against Robert. See Blackburn, Nickels & Smith, Inc. v. National Farmers Union Property & Casualty Co., 452 N.W.2d 319 (N.D.1990). By voluntarily requesting dismissal of the declaratory judgment action, State Farm preempted a judicial determination of coverage. For purposes of this appeal, we must assume that Robert's conduct was covered by the homeowner's policy. ¹

The trial court concluded that State Farm was obligated under the insurance policy to pay Robert's attorney fees for defending the declaratory judgment action. The relevant parts of the policy say:

SECTION II--ADDITIONAL COVERAGES

We cover the following in addition to the limits of liability:

1. Claim Expenses. We pay:

* * * * * *

c. reasonable expenses an insured incurs at our request. This includes actual loss of earnings (but not loss of other income) up to $50 per day for aiding us in the investigation or defense of claims or suits

* * * * * *

SECTION II--CONDITIONS

* * * * * *

3. Duties After Loss. In case of an accident or occurrence, the insured shall perform the following duties that apply. You shall cooperate with us in seeing that these duties are performed:

* * * * * *

c. At our request, assist in:

* * * * * *

(3) the conduct of suits and attend hearings and trials....

The construction of an insurance policy, including a determination of whether the contract is clear and unambiguous, is a question of law that is fully reviewable by this court. Continental Casualty Co. v. Kinsey, 499 N.W.2d 574 (N.D.1993). As we said in State Farm Mutual Auto. Ins. Co. v. LaRoque, 486 N.W.2d 235 (N.D.1992), an insurance contract is ambiguous when reasonable arguments can be made in support of different positions as to its meaning.

We disagree with State Farm that this policy language is unambiguous. ² The language can be reasonably interpreted to require the insurer to pay its insured's litigation expenses only for claims and lawsuits brought by third parties against the insured. However, it is not so expressed, and the language that State Farm will pay its insured's "reasonable expenses" incurred at the company's "request" is broad in scope and is without express conditions. That broad language can also be reasonably interpreted to require State Farm to pay its insured's expenses in defending a lawsuit by State Farm to determine policy coverage. Because there are several reasonable interpretations of this policy language, we conclude that the policy is ambiguous.

Other jurisdictions have construed similar policies. For example, in Olympic S.S. Co., Inc. v. Centennial Ins. Co., 117 Wash.2d 37, 811 P.2d 673, 680-681 (1991), the policy said that the insurer would pay "reasonable expenses incurred by the insured at the Company's request." The Supreme Court of Washington concluded that this clause required the insurer to reimburse its insured for attorney fees incurred in determining whether there was coverage under the policy. Its reasoning is persuasive:

When an insured purchases a contract of insurance, it seeks protection from expenses arising from litigation, not "vexatious time-consuming, expensive litigation with his insurer." ... Whether the insured must defend a suit filed by third parties, appear in a declaratory action, or as in this case, file a suit for damages to obtain the benefit of its insurance contract is irrelevant. In every case, the conduct of the insurer imposes upon the insured the cost of compelling the insurer to honor its commitment and, thus, is equally burdensome to the insured.... Further, allowing an award of attorney fees will encourage the prompt payment of claims.

[Citations omitted] 811 P.2d at 681. We agree that an insured purchases liability insurance for protection from litigation expense.

Construing a similar contract provision, the Supreme Court of Idaho, in Occidental Fire & Casualty Co. v. Cook, 92 Idaho 7, 435 P.2d 364, 368 (1967), explained its conclusion that an insured's attorney fees in a declaratory judgment action are covered expenses:

Appellant contends that the trial court erred in awarding attorneys' fees to Lloyd Cook under the terms of the insuring agreement. Section II(e) of the "Insuring Agreements" contained in the insurance contract, reads:

"The company shall--reimburse the insured for all reasonable expenses, other than loss of earnings incurred at the company's request."

The fact that this is a declaratory judgment action should have no effect on the award of "reasonable expenses" to the insured. Lloyd's rights are being determined in this cause and he is required to defend. Appellant Company cannot avoid its responsibility under Section II(e) of the insuring agreements, on the ground that the action is for declaratory judgment relief, when the effect upon the insured is as burdensome in its consequences as any other type of legal action.

For other examples, see Allstate Ins. Co. v. Robins, 42 Colo.App. 539, 597 P.2d 1052 (1979); Security Mutual Casualty Co. v. Luthi, 303 Minn. 161, 226 N.W.2d 878 (1975); Upland Mutual Ins., Inc. v. Noel, 214 Kan. 145, 519 P.2d 737 (1974). These and other jurisdictions have similarly interpreted like policy language.

There is contrary authority. Some courts have refused to construe similar contract language to cover attorney fees in a declaratory judgment action. For an example, see Liberty Mutual Ins. Co. v. Continental Casualty Co., 771 F.2d 579 (1st Cir.1985). We do not find this reasoning persuasive, especially in view of our rule that, absent another controlling criterion, ambiguous insurance language should be interpreted most favorable to the insured. Heitkamp v. Milbank Mutual Ins. Co., 383 N.W.2d 834 (N.D.1986). The more persuasive reasoning, we believe, is found in those declaratory judgment cases concluding that policies like this one obligated the insurer to pay its insured's attorney fees for determining coverage. The policy language is broad in scope, and we construe it to require State Farm to pay for...