U.S. Fire Ins. Co. v. Good Humor Corp.

• Decision Date: 15 December 1992
• Docket Number: 92-2318,Nos. 92-0642,s. 92-0642
• Citation: 173 Wis.2d 804,496 N.W.2d 730
• Parties: UNITED STATES FIRE INSURANCE COMPANY and Westchester Fire Insurance Company, Plaintiffs-Appellants-Cross-Respondents, v. GOOD HUMOR CORPORATION, as successor to Gold Bond Ice Cream, Inc., Defendant-Respondent-Cross-Appellant. UNITED STATES FIRE INSURANCE COMPANY, Plaintiff-Appellant, d v. GOOD HUMOR CORPORATION, as successor to Gold Bond Ice Cream, Inc., Defendant-Respondent. . Oral Argument
• Court: Wisconsin Court of Appeals

Page 730

496 N.W.2d 730

173 Wis.2d 804

UNITED STATES FIRE INSURANCE COMPANY and Westchester Fire

Insurance Company, Plaintiffs-Appellants-Cross-Respondents, v. GOOD HUMOR CORPORATION, as successor to Gold Bond Ice Cream, Inc., Defendant-Respondent-Cross-Appellant.

UNITED STATES FIRE INSURANCE COMPANY, Plaintiff-Appellant,^d v. GOOD HUMOR CORPORATION, as successor to Gold Bond Ice Cream, Inc., Defendant-Respondent.

Nos. 92-0642, 92-2318.

Court of Appeals of Wisconsin.

Oral Argument Dec. 15, 1992.

Opinion Released Jan. 20, 1993.

Opinion Filed Jan. 20, 1993.

On behalf of the plaintiff-appellant, U.S. Fire Ins. Co., the cause was submitted on the briefs of John M. Swietlik and Vicki L. Arrowood and oral argument of John M. Swietlik of Kasdorf, Lewis & Swietlik, S.C. of Milwaukee.

On behalf of the plaintiffs-appellants-cross-respondents, U.S. Fire Ins. Co. and Westchester Fire Ins. Co., the cause was submitted on the briefs of John M. Swietlik and Patti J. Kurth and oral argument of John M. Swietlik of Kasdorf, Lewis & Swietlik, S.C. of Milwaukee.

On behalf of the defendant-respondent and the defendant-respondent-cross-appellant, Good Humor Corp., the cause was submitted on the briefs of Joseph M. Nicks and Michael B. Apfeld and oral argument of Joseph M. Nicks of Godfrey & Kahn, S.C. of Green Bay.

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

CANE, Presiding Judge.

United States Fire Insurance Company and Westchester Fire Insurance Company appeal part of a summary judgment holding that they breached their duty to defend Gold Bond Ice Cream, Inc., and an order denying relief from that judgment. The insurers assert that (1) because several exclusions eliminated their duty to indemnify Gold Bond, they had no duty to defend; (2) the circuit court wrongfully dismissed their declaratory judgment action; and (3) the circuit court wrongfully refused to grant their sec. 806.07, Stats., motion. Good Humor Corporation, as successor to Gold Bond, cross-appeals that part of the summary judgment limiting the insurers' liability to the policy limits, and denying Gold Bond prejudgment interest and attorney fees.

We conclude that the insurers had a duty to defend Gold Bond and breached that duty, and that Gold Bond is entitled to the policy limits and attorney fees incurred in both defending the underlying action and proving coverage. Because the settlement amount and the costs incurred in defending the underlying action are readily determinable, Gold Bond is entitled to 5% interest on both amounts from the date of Gold Bond's counterclaim. However, Gold Bond is not entitled to prejudgment interest at 12% under sec. 628.46, Stats. Therefore, we affirm in part and reverse in part.

FACTS AND PROCEDURAL BACKGROUND

On September 10, 1987, Carnation Company sued Gold Bond in federal court in California. In its complaint, Carnation claimed in excess of $24 million in damages caused by contaminated ice cream it purchased from Gold Bond. The business agreement between Carnation and Gold Bond called for Gold Bond to manufacture bite-sized nuggets of ice cream known as "Bon-Bons" for Carnation, using machinery and related equipment owned by Carnation. ¹ Carnation agreed to supply all packaging materials.

During July 1987, the United States Food and Drug Administration disclosed that certain Carnation items Gold Bond manufactured on March 11, 1987, tested positive for listeria monocytogenes. The FDA recommended a recall of all Bon-Bons and Fruit Scoops manufactured between November 1986 and June 1987. Carnation ordered the recall and initiated a lawsuit against Gold Bond to recover its damages.

Westchester issued Gold Bond a comprehensive general liability policy providing primary coverage with liability limits of $1 million. U.S. Fire provided Gold Bond with a commercial umbrella policy of an additional $10 million dollars of liability coverage. Both Westchester and U.S. Fire rejected Gold Bond's tenders of defense.

Gold Bond then provided its own defense and eventually reached a settlement with Carnation on July 21, 1989. The settlement payment exceeded the combined policy limits of the U.S. Fire and Westchester policies and was made on August 24, 1989.

On August 25, 1989, both insurers brought this action for declaratory judgment seeking a declaration that neither had a duty to defend or indemnify Gold Bond in the federal action. Gold Bond counterclaimed for breach of contract requesting indemnification and the costs and expenses of defending the federal action, including reasonable attorney fees. The counterclaim did not state that Gold Bond's payment to Carnation exceeded the policy limits, nor did it state the cost of defending the California action.

Both sides brought summary judgment motions. The trial court determined that the insurers' declaratory judgment action was not timely and that they breached their duty to defend under the policy. However, the trial court limited the insurers' liability to the limits of each policy and denied Gold While preparing their appellate briefs, U.S. Fire and Westchester discovered that attachments to a letter not included in the record on appeal showed that although the stipulation ending the federal action was signed on August 24, 1989, the order confirming such stipulation was not signed until September 21, 1989. Thus, the California action was not completed when U.S. Fire and Westchester brought their declaratory action on August 25, 1989. On this basis, U.S. Fire and Westchester filed a sec. 806.07, Stats., motion for relief from the trial court's judgment. ² The trial court again concluded that the insurers' action was too late and issued an order denying relief from the judgment and holding that the previous judgment remained in full force and effect. U.S. Fire and Westchester appealed that order and the two appeals were joined.

Bond's motion for prejudgment interest. Both sides appeal this judgment.

ISSUES AND STANDARD OF REVIEW

The appellate issues are as follows:

I. Did U.S. Fire and Westchester have a duty to defend Gold Bond based on the insurance policies, in light of the following sub-issues?

A. Is Carnation an insured under either of the policies?

B. Was there an "occurrence" based on the allegations in the complaint?

C. Does the "sistership" exclusion apply?

D. Does the "business risk" exclusion apply?

E. Does the "failure to perform" exclusion apply?

F. Does the "cross-liability" exclusion in the U.S. Fire policy apply?

II. Was U.S. Fire and Westchesters' declaratory judgment action timely instituted?

III. Did the trial court properly exercise its discretion in denying U.S. Fire and Westchesters' motion for relief from judgment?

IV. Was Gold Bond entitled to recover the reasonable costs, including attorney fees, it incurred in defending the California lawsuit?

V. Was Gold Bond entitled to prejudgment interest at either 5% or 12% on the policy limits or on the attorney fees?

VI. Is Gold Bond entitled to recover the reasonable costs, including attorney fees, it incurred in establishing coverage in this action?

When we review a summary judgment, this court applies the same methodology as the trial court. Green Spring Farms v. Kersten, 136 Wis.2d 304, 315, 401 N.W.2d 816, 820 (1987). If there is no genuine issue of material fact and one side is entitled to judgment as a matter of law, the action is appropriate for summary judgment. Bantz v. Montgomery Estates, Inc., 163 Wis.2d 973, 978, 984, 473 N.W.2d 506, 508, 510 (Ct.App.1991).

In return for premiums paid by the insured, U.S. Fire and Westchester assumed the contractual duties of indemnification and defense described in the policies. See Elliott v. Donahue, 169 Wis.2d 310, 320, 485 N.W.2d 403, 407 (1992). An insurance carrier's duty to defend is broader than its duty of indemnification. Id. at 320-21, 485 N.W.2d at 407. If the insurance company refuses to defend, it does so at its own peril. Id. at 321, 485 N.W.2d at 407. When the insurer breaches its duty to defend its insured, it waives any later challenge regarding its duty to indemnify. Professional Office Bldgs. v. Royal Indem. Co., 145 Wis.2d 573, 584-85, 427 N.W.2d 427, 431 (Ct.App.1988). As Professional Office Bldgs. notes, this harsh result can be avoided if the insurer seeks a timely resolution of the coverage issue by a court, rather than determining coverage for itself by refusing to defend. Id. at 585, 427 N.W.2d at 431.

Interpretation of words or clauses in an insurance contract is a question of law. Just v. Land Reclamation, Ltd., 155 Wis.2d 737, 744, 456 N.W.2d 570, 572 (1990). Thus, the dispositive issue is one of law and, therefore, because there are no genuine issues of material fact, the case is properly decided on summary judgment.

I. THE INSURERS' DUTY TO DEFEND

For there to be a duty to defend, there must be allegations in the complaint that, if proven, would fall within coverage (the duty to indemnify) afforded by the policies. ³ Sola Basic Ind. v. USF & G Co., 90 Wis.2d 641, 646, 280 N.W.2d 211, 213 (1979). In Elliott, 169 Wis.2d at 317, 485 N.W.2d at 405-06, our supreme court described the duties of the insurer when coverage is fairly debatable. While it stated that under the principles enunciated in Mowry v. Badger State Mut. Cas. Co., 129 Wis.2d 496, 516-17, 385 N.W.2d 171, 180-81 (1986), an insurer may reject the tender of defense when coverage issues are fairly debatable without breaching their duty to defend if the coverage determination precedes the underlying action, the Elliott court ruled that the insurer still must provide a defense to the insured in the underlying action if the underlying action comes before a coverage determination. Elliott, 169 Wis.2d at 318, 485 N.W.2d at 406. In this case, although the underlying liability issue was tried before coverage was determined, U.S. Fire and Westchester did not defend Gold Bond. Therefore, if the coverage issue is fairly debatable, U.S. Fire and Westchester...