Wells Dairy v. Travelers Indem. Co. of Illinois

• Decision Date: 09 July 2003
• Docket Number: No. C01-4097-MWB.,C01-4097-MWB.
• Citation: 266 F.Supp.2d 964
• Parties: WELLS' DAIRY, INC., Plaintiff, v. TRAVELERS INDEMNITY COMPANY OF ILLINOIS, Travelers Insurance Company, and Travelers Property Casualty Corporation, Defendants.
• Court: U.S. District Court — Northern District of Iowa

266 F.Supp.2d 964

WELLS' DAIRY, INC., Plaintiff, v. TRAVELERS INDEMNITY COMPANY OF ILLINOIS, Travelers Insurance Company, and Travelers Property Casualty Corporation, Defendants.

No. C01-4097-MWB.

United States District Court, N.D. Iowa, Western Division.

July 9, 2003.

Mary Rose Alexander, Latham & Watkins, Chicago, IL, Richard H. Moeller, Berenstein, Moore, Berenstein, Heffernan & Moeller, L.L.P., Sioux City, IA, for plaintiff Wells at oral arguments.

Stephen G. Goldman, Gerald P. Dwyer, Jr., Robinson & Cole, L.L.P., Hartford, CT, Jaki K. Samuelson, Whitfield & Eddy, P.L.C., Des Moines, IA, for defendant Travelers at oral arguments.

MEMORANDUM OPINION AND ORDER REGARDING PLAINTIFF'S MOTION TO ENFORCE

BENNETT, Chief Judge.

I. INTRODUCTION

On August 30, 2002, plaintiff Wells' Dairy, Inc. ("Wells") filed a motion for partial summary judgment against defendants Travelers Indemnity Company of Illinois, Travelers Insurance Company, and Travelers Property Casualty Corporation (collectively "Travelers" unless otherwise indicated). On January 31, 2003, the court granted that portion of Wells's motion in which it sought a declaration that Travelers has an obligation to defend Wells against lawsuits brought by two customers, Pillsbury Company ("Pillsbury") and Eskimo Pie Corporation ("Eskimo Pie").

On May 23, 2003, Wells filed its Motion To Enforce The Court's Order Of January 31, 2003 Regarding Traveler's Duty To Defend (# 135). In its motion, Wells requests that the court order Travelers to reimburse Wells $590,545.97 for the costs of defense in the lawsuits brought by Pillsbury and Eskimo Pie through January 31, 2003, require Travelers to pay prejudgment interest for those costs, and require Travelers to reimburse Wells for its reasonable attorney's fees and expenses as those costs are incurred. Travelers filed a timely response to Wells's motion in which it contends that the court should deny the motion on the following grounds: that Wells is not entitled to any further decision or order because the court's order of January 23, 2003, did not require Travelers to make any payments to Wells; that it is inappropriate for the court to order reimbursement of attorney's fees based on the invoices submitted by Wells because those invoices raise factual questions regarding their propriety; that Travelers's duty to defend Wells does not require it pay the fees of counsel selected by Wells; and that Travelers has offered to retain attorney William Fanter and his firm, Bradshaw, Fowler, Proctor & Fairgrave, P.C., to defend Wells but Wells has refused this offer. Wells filed a reply brief in support of its motion on June 13, 2003.

Pursuant to Travelers's request, the court held telephonic oral arguments on Wells's Motion To Enforce The Court's Order Of January 31, 2003 Regarding Traveler's Duty To Defend on June 16, 2003. At the oral arguments, plaintiff Wells was represented by Mary Rose Alexander of Latham & Watkins, Chicago, Illinois, and Richard H. Moeller of Berenstein, Moore, Berenstein, Heffernan & Moeller, L.L.P., Sioux City, Iowa. Defendant Travelers was represented by Stephen G. Goldman and Gerald P. Dwyer, Jr. of Robinson & Cole, L.L.P., Hartford, Connecticut, and Jaki K. Samuelson of Whitfield & Eddy, P.L.C., Des Moines, Iowa.

II. LEGAL ANALYSIS

A. Wells's Selection Of Defense Counsel

In granting Wells's partial motion for summary judgment, the court concluded that Travelers has a duty to defend Wells in the underlying lawsuits because there is potential or possible liability to indemnify Wells based upon the facts appearing at the outset of the underlying cases. See United Fire & Cos. Co. v. Shelly Funeral Home, Inc., 642 N.W.2d 648, 656 (Iowa 2002) (the duty to defend arises "whenever there is potential or possible liability to indemnify the insured based on the facts appearing at the outset of the case.") (quoting First Newton Nat'l Bank v. General Casualty Co. of Wis., 426 N.W.2d 618, 623 (Iowa 1988)); see also Yegge v. Integrity Mut. Ins. Co., 534 N.W.2d 100, 102 (Iowa 1995) (duty to defend whenever potential liability to indemnify based upon facts appearing at outset of the case; however, duty to defend and duty to indemnify are co-extensive duties in that there is no duty to defend unless there is a duty to indemnify); Essex Ins. Co. v. Fieldhouse, Inc., 506 N.W.2d 772, 774 (Iowa 1993) (noting that in analyzing the potential duty to defend, which is broader than the duty to indemnify, the appropriate starting point is the allegations contained in the petition); Kartridg Pak Co. v. Travelers Indem Co., 425 N.W.2d 687, 688 (Iowa Ct.App.1988) (to determine whether insurer had duty to defend, court construes the policy and looks to the pleadings and all other admissible and relevant facts in the record to determine whether coverage exists under the policy).

The central issue raised in Wells's current motion is the degree of autonomy Wells may exercise in selecting its own defense counsel, and whether Travelers is liable for Wells's attorney's fees, in light of the fact that Travelers refused to defend Wells under a reservation of rights. Wells argues that because Travelers refused to defend Wells initially under a reservation of rights, Wells was free to pursue its own defense not subject to Travelers's control. Wells asserts that Travelers must accordingly reimburse Wells for attorney's fees incurred up to this point in the case and must pay all future attorney's fees incurred by Wells in its defense of the underlying actions. Travelers responds that Wells is not entitled to unilaterally select defense counsel and to have Travelers reimburse Wells for the costs of this unilaterally selected counsel. Instead, Travelers contends that it is only obligated to pay the fees of independent defense counsel that it has selected. Thus, the central issue for resolution is which party controls the defense here?

Generally, under Iowa law, "[w]hen an insurer defends an insured, it has control over the defense and over settlement."

¹

Kelly v. Iowa Mut. Ins. Co., 620 N.W.2d 637, 643 (Iowa 2000); see Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 32 (Iowa 1982). This control, however, is not absolute. See Kelly, 620 N.W.2d at 639 (holding that "if the insurance company has breached the contract by wrongfully rejecting a reasonable settlement offer, the insured may accept the settlement offer over the insurer's objection without breaching policy duties and losing his right to seek coverage."). Here, Travelers refused to defend Wells when Wells made a timely demand for Travelers to provide it with a defense to the underlying lawsuits. The parties have cited the court to no Iowa case dealing with precisely the issue of whether an insurer's refusal to defend on the ground of noncoverage results in that insurer forfeiting its rights to the control of the defense, and the court's own search has found none. Other states' supreme and appellate courts, however, have held that when an insurer refuses to defend its insured, it does so at its own peril and loses the right to control the defense. See Eigner v. Worthington, 57 Cal.App.4th 188, 196, 66 Cal.Rptr.2d 808, 813 (1997) ("When an insurer wrongfully refuses to defend, the insured is relieved of his or her obligation to allow the insurer to manage the litigation and may proceed in whatever manner is deemed appropriate."); Benjamin v. Dohm, 189 Wis.2d 352, 365, 525 N.W.2d 371, 376 (Ct.App.1994) ("An insurer will lose its right to contest coverage and to control the defense when it improperly refuses to defend the insured."); Sentinel Ins. Co. v. First Ins. Co. of Haw., 76 Hawai'i 277, 296, 875 P.2d 894, 913 (1994) (noting that "the insurer that refuses to defend does so at its own peril. For example, the insurer forfeits any right to control the defense costs and strategy ..."); Grube v. Daun, 173 Wis.2d 30, 76, 496 N.W.2d 106, 124 (Ct.App.1992) (holding that insured has lost its contractual right to control insured's defense by inappropriately refusing to defend); Patrick v. Head of Lakes Coop. Elec. Ass'n., 98 Wis.2d 66, 72-73, 295 N.W.2d 205 (Ct. App.1980) (when an insurer refuses to defend, it loses the right to control the defense or the settlement of the action); Orleans Village v. Union Mut. Fire Ins. Co., 133 Vt. 217, 220, 335 A.2d 315, 318 (1975) (holding that "an insurer who refuses to defend after timely demand is made upon it to do so cannot control the defense Or expect advance notice of the refused party's trial strategy."); Arenson v. National Auto. & Cas. Ins. Co., 48 Cal.2d 528, 537, 310 P.2d 961, 967 (1957) (noting that "`An insurer's unwarranted refusal to defend a suit against the insured has been held to relieve the latter from his contract obligation to leave the management of such suits to the insurer, and to justify him in defending the action on his own account.'") (quoting 8 APPLEMAN, INSURANCE LAW AND PRACTICE 36-41, § 4691); see also Drinnon v. Oliver, 24 Cal.App.3d 571, 580, 101 Cal.Rptr. 120, 125 (1972) (holding that an insurer which wrongfully refuses to defend loses control over the management of the claim), overruled on other grounds in Johnson & Johnson v. Superior Court, 38 Cal.3d 243, 255, 211 CaLRptr. 517, 695 P.2d 1058 (1985). Given the Iowa Supreme Court's decision in Kelly, that an insurer can lose its right to control settlement negotiations by wrongfully rejecting a reasonable settlement offer, see Kelly, 620 N.W.2d at 639, the court concludes that the Iowa Supreme Court would likewise adopt the position taken by its sister courts and hold that an insurer's refusal to defend a suit against its insured results in the insurer losing the right to control the defense of the action. Thus, the court concludes that in this case, Travelers lost its right to control Wells's defense of the underlying actions when it refused to defend Wells in June 2000, when the first of the underlying lawsuits was filed.

B. Payment Of Wells's...