COURT OF APPEALS DECISION DATED AND RELEASED |
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June 5, 1997 |
NOTICE |
A party may file with the Supreme Court a petition to review an adverse decision by the Court of Appeals. See § 808.10 and rule 809.62, Stats. |
This
opinion is subject to further editing. If published, the official version
will appear in the bound volume of the Official Reports. |
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STATE OF WISCONSIN |
IN COURT OF APPEALS DISTRICT IV |
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Wayne
K. Hermanson and Sandra Hermanson,
Plaintiffs-Appellants, v. Horace
Mann Insurance Company,
Defendant-Respondent. |
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APPEAL
from a judgment of the circuit court for La Crosse County: DENNIS
G. MONTABON, Judge. Reversed
and cause remanded.
Before
Eich, C.J., Dykman, P.J., and Vergeront, J.
EICH,
C.J. In this “insurer bad-faith”[1] case we are asked to hold that an insurer may properly
decline to defend an action against its insured on the basis of its knowledge
of “extraneous information” that does not appear within the four corners of the
complaint in the action. We conclude
that Grieb
v. Citizens Casualty Co., 33 Wis.2d 552, 148 N.W.2d 103 (1967),
and Professional
Office Buildings, Inc. v. Royal Indemnity Co., 145
Wis.2d 573,
427
N.W.2d 427
(Ct.
App. 1988),
preclude such a holding. We therefore
reverse the trial court’s judgment dismissing the action.
The
facts are not in dispute. Wayne
Hermanson,[2] a La Crosse police officer, was injured in an altercation
with a young man named Wayne Reuter, and Reuter was convicted of felony battery
to a peace officer. Hermanson sued
Reuter for damages, claiming that his injuries resulted from Reuter’s
negligence, among other things. Reuter
tendered the defense of Hermanson’s action to Horace Mann Insurance Company as
an insured under his father’s homeowner’s policy. While investigating Reuter’s claim, Horace Mann learned of
Reuter’s conviction and refused the tender on the basis of a policy provision
excluding coverage for intentionally caused injuries and for acts
“constitut[ing] a violation of any criminal law.”
Reuter
and Hermanson eventually settled the lawsuit, and Reuter assigned to Hermanson
any possible “bad-faith” claim he had against Horace Mann for breach of its
duty to defend him in the underlying lawsuit.
Hermanson then brought this action, seeking to hold Horace Mann liable
for his damages, claiming that it had unreasonably denied coverage and refused
to defend the action. The trial court
granted summary judgment dismissing Hermanson’s complaint, concluding that
Horace Mann’s independent knowledge of Reuter’s battery conviction was
sufficient to trigger the exclusionary clause, which barred coverage as a
matter of law.
Summary
judgment is appropriate in cases in which there is no genuine issue of material
fact and the moving party has established entitlement to judgment as a matter
of law. Germanotta v. National
Indem. Co., 119 Wis.2d 293, 296, 349 N.W.2d 733, 735 (Ct. App.
1984). Because no material facts are in
dispute in this case, we consider the legal issue—whether Horace Mann had a
duty to defend Reuter against Hermanson’s action—de novo. Benjamin v. Dohm, 189 Wis.2d
352, 359, 525 N.W.2d 371, 373-74 (Ct. App. 1994).
We have
held that the duty to defend an insured is “dependent solely on the allegations
of the complaint.” Professional
Office Bldgs., 145 Wis.2d at 581-82, 427 N.W.2d at 430. Amplifying upon that proposition, we said:
Because the duty to defend is not based on extrinsic evidence, but is, as the supreme court has said, triggered by the allegations contained within the four corners of the complaint, it follows that the existence of the duty depends solely upon the nature of the claim being asserted against the insured and has nothing to do with the merits of the claim.
Kenefick v. Hitchcock, 187 Wis.2d 218, 232, 522 N.W.2d 261, 266 (Ct. App. 1994) (quotations and quoted sources omitted). The rule is unequivocal: “If there are allegations in the complaint which, if proven, would be covered by the policy, the insurer has a duty to defend.” Grube v. Daun, 173 Wis.2d 30, 72, 496 N.W.2d 106, 122 (Ct. App. 1992). And in considering the complaint we resolve all doubts in favor of the insured. Sola Basic Indus., Inc. v. United States Fidelity & Guar. Co., 90 Wis.2d 641, 646-47, 280 N.W.2d 211, 214 (1979).
The
parties agree that Hermanson’s original complaint alleged that Reuter
negligently caused Hermanson’s injuries.[3] While Horace Mann
points to its policy terms, which expressly exclude coverage for liability
resulting from the insured’s criminal or intentional acts, at this stage of the
inquiry we are required to ignore “both the merits of the claim and any
exclusionary or limiting terms and conditions of the policies.” Kenefick, 187 Wis.2d at
232, 522 N.W.2d at 266. Based on
allegations of Reuter’s negligence in Hermanson’s complaint, we cannot say that
Horace Mann had no duty to defend the action at least up to the point at which
its policy defenses to coverage were resolved.
Horace Mann, acknowledging the rule that the duty to defend is determined by the four corners of the complaint, suggests that the supreme court’s statement in Grieb, 33 Wis.2d at 558, 148 N.W.2d at 106, that “[t]here are at least four exceptions to the general rule determining the extent of the insurer’s duty to defend,” signals the existence of the “exception” for which it argues here: that when the insurer has extrinsic or independent knowledge of an event or situation triggering a policy exclusion, no such duty exists. But the Grieb court never discussed any such “exceptions.” All it said was: “There are at least four exceptions to the general rule determining the extent of the insurer’s duty to defend and generally the insurer who declines to defend does so at his peril. These and allied problems are extensively covered in Anno. Liability Insurer—Duty to Defend, 50 A.L.R.2d 458.” Id.[4]
Horace Mann argues that despite the lack of any finite discussion of the point in Grieb, the supreme court intended to recognize the existence of the “exception” for which it argues in this case. It points to a federal trial court decision, American Motorists Ins. Co. v. Trane Co., 544 F. Supp. 669 (W.D. Wis. 1982), aff’d, 718 F.2d 842 (7th Cir. 1983), as supporting the view that it may rely on evidence extrinsic to the underlying complaint to determine whether it has a duty to defend an action. In that case the court, while noting that the quoted language in Grieb was dictum because “none of the exceptions referred to in the opinion was the basis for that decision,” went on to say that, in its opinion, “Grieb suggests that under Wisconsin law an insurer may consider known or readily ascertainable facts when deciding whether to defend an insured.” Id. at 677-78. The court thus concluded that “[i]n Wisconsin ... the court may consider facts known at the appropriate time by the insurer when determining whether the insurer has breached its duty to defend.” Id. at 678.
We can only state here, as we
did in Professional Office Buildings, that despite our own
agreement with the district court’s reasoning in American Motorists—reasoning
we described as “persuasive”—we consider ourselves bound by the supreme court’s
ruling in Grieb, and similar cases, that “the [insurer’s] duty to
defend is dependent solely on the allegations of the complaint.” Professional Office Bldgs.,
145 Wis.2d at 580-81, 427 N.W.2d at 430.
Horace
Mann, recognizing our lack of enthusiasm for a blanket
four-corners-of-the-complaint rule for determining the insurer’s duty to
defend—a rule that does not recognize even uncontested extraneous facts that
would deny coverage as a matter of law—asks us to carve out a “narrow
exception” to the Grieb/Professional Office Buildings
rule in this case, and it points to decisions in at
least two other states that have done so.[5] As the supreme
court recently stated, however, the Wisconsin Court of Appeals is a “unitary
court” and, as such, lacks the power to overrule, modify or withdraw language
from a published opinion. Cook v. Cook, 208 Wis.2d 166, 189-90,
560 N.W.2d 246, 256 (1997).[6]
Finally,
Horace Mann argues the merits of its position: that it cannot be held to have
acted in bad faith in refusing the tender of Reuter’s defense because the
policy precluded coverage by reason of Reuter’s intentional criminal acts. Hermanson responds that because Horace Mann
did not follow “proper steps” in obtaining a judicial declaration of coverage
prior to refusing to defend Reuter, it is estopped from now challenging
coverage.
The
supreme court has held that, in cases in which coverage is disputed, “the
proper procedure for an insurance company to follow … is to request a
bifurcated trial on the issues of coverage and liability and move to stay any
proceedings on liability until the issue of coverage is resolved.” Newhouse
v. Citizens Sec. Mut. Ins. Co., 176 Wis.2d 824, 836, 501 N.W.2d 1, 6
(1993). “When this procedure is
followed, the insurance company runs no risk of breaching its duty to
defend.” Id. But when the case proceeds without a prior
determination of coverage, “the insurer who declines
to defend does so at [its] peril.” Grieb, 33 Wis.2d at 558, 148
N.W.2d at 106. And where, as here, an
insurer improperly refuses to defend, it will be held to have waived any
subsequent challenge to coverage. Professional
Office Bldgs., 145 Wis.2d at 585, 427 N.W.2d at 431.
We thus
conclude that, under Professional Office Buildings, Grieb,
and similar cases, Horace Mann must be held to have breached its duty to defend
Reuter in the underlying action and is now estopped from denying coverage for
Hermanson’s injuries. We therefore
reverse the summary judgment dismissing Hermanson’s action and remand to the
trial court for further proceedings consistent with this
opinion.[7]
By
the Court.—Judgment reversed and cause
remanded.
Not
recommended for publication in the official reports.
[1] The tort of bad faith results from a breach of the insurer’s fiduciary duty arising out of the relationship established by the insurance contract. Anderson v. Continental Ins. Co., 85 Wis.2d 675, 688-89, 271 N.W.2d 368, 375 (1978). Specifically, when an insurer unreasonably and in bad faith declines to pay an insured’s claim, it is subject to liability in tort. Id. at 689, 271 N.W.2d at 375. To establish bad faith, a plaintiff must demonstrate “the absence of a reasonable basis for denying benefits” and the insurer’s “knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” Id. at 691, 271 N.W.2d at 376.
[2] Hermanson’s wife, Sandra, is also a plaintiff in the action.
[3] Hermanson’s original complaint in the underlying action does not appear in the record. His complaint in the instant action states that “[a]mong the causes of action[] contained in the [original] complaint was [one] sounding in negligence against Wayne Reuter.”
[4] The cited annotation sets forth what it terms “special situations” that “are not covered directly by the general rule” of a insurer’s duty to defend. They arise when: (1) there is a conflict between allegations in the complaint and extrinsic facts known to or ascertainable by the insurer; (2) the complaint contains ambiguous or incomplete allegations; (3) the complaint alleges some facts that represent a covered risk and others that do not; and (4) the complaint states conclusions rather than alleging facts. C.T. Drechsler, Annotation, Allegations in Third Person’s Action Against Insured as Determining Liability Insurer’s Duty to Defend, 50 A.L.R.2d 458, 464 (1958). As we discuss below, courts are split as to whether the first situation still requires the insurer to base its defense on the allegations in the complaint or whether it can rely on other facts to determine its duty; in the other three situations, resolving doubts in the insured’s favor, the insurer must still defend if the complaint contains any allegation that would bring the case within the terms of the policy coverage. Id. at 464-65.
[5] Courts in Minnesota and Washington have held that an insurer has no duty to defend when “facts outside the complaint are such that any liability resulting from the cause of action would be excluded from coverage.” Denike v. Western Nat’l Mut. Ins. Co., 473 N.W.2d 370, 373 (Minn. Ct. App. 1991); see also E-Z Loader Boat Trailers, Inc. v. Travelers Indem. Co., 726 P.2d 439, 444 (Wash. 1986). In the other cases Horace Mann cites as reaching a similar conclusion, the insurer—unlike Horace Mann in this case—litigated coverage before declining to defend the insured. Such a procedure, as we discuss below, has been recognized as a means of avoiding the very predicament in which Horace Mann finds itself here.
[6] Horace Mann also states that if we do not recognize an extrinsic-facts exception to the four-corners rule, “insurers will be forced to clog the already overcrowded court system with declaratory judgment lawsuits, or to delay pending litigation with motions ... in order to resolve nonexistent coverage issues.” We disagree. In discussing the duty to defend in Grube v. Daun, 173 Wis.2d 30, 75-76, 496 N.W.2d 106, 123-24 (Ct. App. 1992), we said that
the policy of judicial economy is a reason behind requiring insurers either to provide a defense immediately or to use alternate methods to reduce the costs of providing a defense until the coverage issue is decided. If insurers have a duty to defend from the time the suit is initiated, then these insurers will be inclined to settle; thus, the strain on the courts is reduced.
[7] As Hermanson notes in his brief, the trial court never determined what damages, if any, he may be entitled to recover from Horace Mann, and that issue is not before us.