Summary
stating that an insurer does not have a duty to settle all claims within the policy limits regardless of whether the policy provide coverage for a particular claim
Summary of this case from Sacred Heart Health Servs. v. MMIC Ins.Opinion
No. A05-917.
Filed May 23, 2006.
Appeal from the District Court, Stearns County, File No. C4-04-1900.
Douglas L. Skor, Louise Dovre Bjorkman, John M. Bjorkman, Larson King, L.L.P., (for appellant).
William M. Hart, Stacy A. Broman, Damon L. Highly, Meagher Geer, P.L.L.P., (for respondents Transcontinental Insurance Company, Continental Casualty Company).
James T. Martin, Gislason, Martin Varpness, P.A., (for respondent Western National Mutual Insurance Company).
Considered and decided by Dietzen, Presiding Judge; Wright, Judge; and Worke, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2004).
UNPUBLISHED OPINION
In this appeal from summary judgment, appellant argues that respondents (a) breached their duty to defend appellant in the underlying lawsuits; (b) breached their duty to indemnify appellant for the settlement of those lawsuits; and (c) refused to pay appellant's defense costs. By notice of review, respondents argue that there are additional bases for summary judgment because (a) a settlement of compensatory-damages claims limited the scope of their duty to defend, and (b) appellant failed to sign a loan-receipt agreement. We affirm.
FACTS
Appellant Seren Innovations, Inc. (Seren) was the contractor on a fiber optic cable installation project in St. Cloud. Seren hired Cable Constructors, Inc. (CCI) to perform the construction and installation of the cable. Although Seren had a primary insurance carrier, respondent Western National Mutual Insurance Company (Western National), the construction contract between Seren and CCI required CCI to purchase additional insurance to indemnify Seren. In satisfaction of this requirement, CCI purchased policies from respondents Transcontinental Insurance Co. (Transcontinental) and Continental Casualty Co. (Continental) (collectively CNA). CCI purchased from Transcontinental a commercial general-liability policy with coverage of $1 million. CCI purchased from Continental a commercial umbrella policy with coverage of $25 million.
On December 11, 1998, CCI construction workers accidentally struck a natural gas line, resulting in an explosion that killed four people, injured several others, and damaged nearby property. Claims for injury and wrongful death arose from the St. Cloud explosion. One group of plaintiffs was collectively known as the "Robins plaintiffs" because of their representation by the law firm of Robins, Kaplan, Miller Ciresi, L.L.P. Thomas Sandquist (Sandquist), trustee for the heirs of Carolyn Sandquist, whose claim underlies the instant case, was one of the Robins plaintiffs.
CNA retained separate counsel to represent CCI and accepted the terms of Seren's tendered defense of claims arising from the St. Cloud explosion, including the designation of the law firm of Maslon Edelman Borman Brand, L.L.P. (Maslon) as defense counsel for Seren.
In May 2001, CNA engaged in settlement negotiations with the Robins plaintiffs to settle their claims. In a letter dated May 4, 2001, CNA notified Seren that the Robins plaintiffs were not interested in releasing Seren from any obligation that might arise for punitive damages. CNA also advised Seren that the Transcontinental policy did not cover punitive damages and, citing Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411 (Minn. 1997), further advised that CNA could settle the compensatory-damages claims and terminate its defense of Seren as to the issue of punitive damages. CNA sought Seren's contribution for a settlement of any possible punitive-damages claims, but Seren declined to contribute. Under a Pierringer agreement dated August 16, 2001, CNA settled only the compensatory-damages claims against Seren. The settlement agreement included circular-indemnity obligations for the compensatory-damages claims among Seren, CCI, and the Robins plaintiffs. Sandquist agreed to indemnify CCI and its insurers for any payment Seren may make to resolve Sandquist's compensatory-damages claims against Seren.
"A Pierringer agreement allows a plaintiff to release a settling defendant and to discharge a part of the plaintiff's cause of action while reserving the balance of the cause of action against the nonsettling defendants." Reedon of Faribault, Inc. v. Fid. Guar. Ins. Underwriters, Inc., 418 N.W.2d 488, 490 (Minn. 1988); accord Pierringer v. Hoger, 124 N.W.2d 106 (Wis. 1963).
A circular-indemnification agreement obligates the plaintiff to "indemnify the defendant for claims including the plaintiff's own claim. In such a situation, the plaintiff's right to recover damages from the defendant is offset by the plaintiff's obligation to repay the same damages to the defendant." Nat'l Hydro Sys. v. M.A. Mortenson Co., 529 N.W.2d 690, 693 (Minn. 1995) (citations omitted).
On August 17, 2001, the Robins plaintiffs moved to amend their complaint to assert a claim for punitive damages against Seren. The district court concluded that the Robins plaintiffs had made a threshold showing that Seren had acted with a deliberate disregard for the rights and safety of others. Accordingly, the district court granted the motion of the Robins plaintiffs to amend their complaint. Seren then moved for summary judgment on the Robins plaintiffs' compensatory and punitive-damages claim, which the district court denied. The district court determined that the punitive-damages claim that the Robins plaintiffs had asserted against Seren was independent of the August 2001 settlement of compensatory damages. Consequently, the district court permitted the Robins plaintiffs to continue to pursue their punitive-damages claim. On December 22, 2003, shortly after the district court denied its motion for summary judgment, Seren settled all remaining claims with the Robins plaintiffs.
After the settlement, CNA learned of a possible conflict of interest between Seren's counsel, Maslon, and Seren's primary insurance carrier, Western National. Suspecting collusion between Maslon and Western National related to the Robins plaintiffs' settlement, CNA began withholding payment from Maslon. CNA subsequently resolved its fee dispute and paid all outstanding invoices owed to Maslon in October 2004.
On April 29, 2004, Seren filed suit against CNA based on CNA's settlement of the compensatory-damages claim without also settling the punitive-damages claim. Seren alleged that CNA breached (1) its duty to defend; (2) its duty to indemnify; (3) the implied covenant of good faith and fair dealing; and (4) its fiduciary duty. Seren also sought a declaratory judgment that CNA had a continuing duty to defend Seren in all pending cases, or, in the alternative, that CNA had an obligation to pay all outstanding litigation-defense invoices.
On November 18, 2004, the district court dismissed the claims of breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing, reasoning that, based on the allegations in the complaint, those claims were incorporated in the claim for breach of the duty to defend and the duty to indemnify. The district court denied the motions to dismiss the other claims. On February 18, 2005, however, the district court granted CNA summary judgment on the remaining claims for breach of the duty to defend and the duty to indemnify. The district court determined that Seren's insurance policies with CNA did not cover punitive-damages claims. Thus, CNA had not breached its duty to defend or its duty to indemnify Seren. Moreover, because Seren was unable to produce any evidence that it had not received the defense to which it was entitled, the district court concluded that summary judgment was warranted. This appeal followed.
DECISION
Whether summary judgment was properly granted is a question of law, which we review de novo. Prior Lake Am. v. Mader, 642 N.W.2d 729, 735 (Minn. 2002). In doing so, we consider whether there are any genuine issues of material fact and whether the district court erred in its application of the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). A genuine issue of material fact does not exist when "the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party." DLH, Inc. v. Russ, 566 N.W.2d 60, 69 (Minn. 1997) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 1356 (1986)). "[T]he party resisting summary judgment must do more than rest on mere averments." Id. at 71. Indeed, a genuine issue for trial must be established by substantial evidence. Id. at 69-70. In applying the standard for summary judgment, we view the evidence in the light most favorable to the party against whom summary judgment was granted. Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993). Summary judgment is appropriate when a party fails to establish the existence of an element essential to the party's case. Bersch v. Rgnonti Assocs., 584 N.W.2d 783, 786 (Minn.App. 1998), review denied (Minn. Dec. 15, 1998).
I.
Because the claims alleged here are founded on CNA's failure to settle the Sandquist punitive-damages claim, a threshold issue to be resolved is whether the CNA insurance polices provided punitive-damages coverage. To address this issue, we must examine the language of the insurance contracts. Construction of an insurance contract as applied to the facts presented is a question of law, which we review de novo. Meister v. W. Nat'l Mut. Ins. Co., 479 N.W.2d 372, 376 (Minn. 1992). We apply general principles of contract construction when we interpret an insurance policy. Lobeck v. State Farm Mut. Auto. Ins. Co., 582 N.W.2d 246, 249 (Minn. 1998). In doing so, we give the unambiguous terms used in the insurance policy "their plain, ordinary, and popular meaning, so as to effect the intent of the parties." Ostendorf v. Arrow Ins. Co., 288 Minn. 491, 495, 182 N.W.2d 190, 192 (1970). We will not redraft an insurance policy to provide coverage when the plain language of the policy establishes that coverage does not exist. Id., 182 N.W.2d at 192. If we conclude that the policy language is ambiguous, however, we will resolve the ambiguity in the insured's favor. Columbia Heights Motors, Inc. v. Allstate Ins. Co., 275 N.W.2d 32, 36 (Minn. 1979).
Seren's claims for breach of the duty to defend and breach of the duty to indemnify are grounded in its contention that the insurance policies cover punitive damages. The Transcontinental commercial general-liability policy provides coverage for "those sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage.'" "Bodily injury" is defined in the policy as "bodily injury, sickness or disease sustained by a person, including death." The policy defines "property damage" as "[p]hysical injury to tangible property, including all resulting loss of use of that property." The Continental commercial umbrella policy provides similar coverage for "bodily injury" and "property damage." The language of the policies is unambiguous. Neither policy contains specific language including or excluding punitive damages. But when giving the terms used in the policies their plain meaning, it is clear that the policies covered only compensatory damages for property damage or bodily injury.
The damages addressed in the insurance polices are compensatory damages intended to compensate injured parties for actual losses. See Phelps v. Commonwealth Land Title Ins. Co, 537 N.W.2d 271, 275 (Minn. 1995) (noting that compensatory damages are understood to be those damages for which a person has actual losses). Compensatory damages differ from punitive damages, which are intended to punish the tortfeasor, deter repeat conduct, and deter others from engaging in similar conduct. Jensen v. Walsh, 623 N.W.2d 247, 251 (Minn. 2001). "Without punitive damages, one who acts with deliberate disregard of the rights or safety of others faces no greater penalty than a well-meaning but negligent offender." Id. Thus, punitive damages focus on the tortfeasor's conduct rather than on the damage that results from the conduct. Id. The insurance policies covered damages for personal injury, death, or property destruction, not damages imposed to sanction the tortfeasor's conduct. Therefore, the CNA insurance policies provided Seren coverage for compensatory damages without providing any coverage for punitive damages.
Generally, insurance coverage for punitive damages is contrary to public policy because it would defeat the purpose of punishing wrongdoers. Wojciak v. N. Package Corp., 310 N.W.2d 675, 680 (Minn. 1981) ("In spite of the lack of certainty concerning the deterrent effect of punitive damages, we are satisfied that in most instances public policy should prohibit a person from insuring himself against misconduct of a character serious enough to warrant punitive damages."). This general prohibition is subject to an exception for punitive-damages claims based on vicarious liability. Perl v. St. Paul Fire Marine Ins. Co., 345 N.W.2d 209, 216 (Minn. 1984); Lake Cable Partners v. Interstate Power Co., 563 N.W.2d 81, 86 (Minn.App. 1997) ("Punitive damages may only be insured against by those who may be vicariously liable."), review denied (Minn. July 10, 1997). The Minnesota Legislature codified this principle in Minn. Stat. § 60A.06, subd. 4 (2004), by permitting insurance companies to insure against vicarious liability for punitive damages. 2000 Minn. Laws ch. 304, § 1, at 177. Under the statutory codification of the common-law exception, providing coverage for punitive damages that arise through vicarious liability would not violate public policy.
Notwithstanding the absence of specific policy language providing coverage for punitive damages, Seren maintains that the vicarious-liability exception applies here. But this exception does not create punitive-damages coverage where none is provided by the plain language of the insurance contract, even in those cases when the damages arise from vicarious liability. Absent policy language providing coverage for punitive damages, we will not create coverage where coverage does not exist, even if such coverage would fall within the vicarious-liability exception to the punitive-damages-coverage prohibition.
Moreover, we note that the record does not support a conclusion that the punitive damages at issue here were based on vicarious liability. The record establishes that Seren failed to take adequate safety measures and failed to provide training to its agents. As the district court aptly concluded when granting the Robins plaintiffs' motion to amend their complaint:
There is no evidence Defendant Seren had any type of safety program in place, either for itself or Defendant CCI, nor is there evidence that Defendant Seren required that CCI have a safety program in place. There is no evidence Defendant Seren supplied safety training, nor did it question whether the crews received training. There is no proof of training on the appropriate response to emergency situations, including hitting a natural gas line.
The record supports the district court's determination that Seren's conduct gave rise to the punitive-damages claim. Accordingly, there is no factual basis to support Seren's contention that the punitive-damages claim was based on vicarious liability.
In sum, because the unambiguous language of the policies does not provide coverage for punitive damages, the district court correctly concluded that the CNA policies covered only the compensatory-damages claims.
II. A.
Seren contends that CNA breached its duty to defend by abandoning Seren during the litigation of the Robins plaintiffs' punitive-damages claims. The duty of an insurer to defend its insured arises when the insurance contract "arguably" provides coverage for the claims alleged in the complaint. Franklin v. W. Nat'l Mut. Ins. Co., 574 N.W.2d 405, 406-07 (Minn. 1998). The insurer's obligation to defend is
determined by the allegations of the complaint and the indemnity coverage of the policy. If any part of a cause of action is arguably within the scope of coverage, the insurer must defend. Any ambiguity is resolved in favor of the insured, and the burden is on the insurer to prove that the claim clearly falls outside the coverage afforded by the policy. If the claim is not clearly outside coverage, the insurer has a duty to defend.
Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 390 (Minn. 1979). "To determine whether there is a duty to defend, we compare the allegations in the underlying complaint with the relevant language in the insurance policy." St. Paul Fire Marine Ins. Co. v. Seagate Tech., Inc., 570 N.W.2d 503, 505-06 (Minn.App. 1997).
An insurer can be liable for a breach of its duty to the insured for failing to exercise "good faith in considering offers to compromise the claim for an amount within the policy limits." Short v. Dairyland Ins. Co., 334 N.W.2d 384, 387 (Minn. 1983) (quotation omitted). A breach of the duty to defend occurs when "the insured is clearly liable and the insurer refuses to settle within the policy limits and the decision not to settle within the policy limits is not made in good faith and is not based upon reasonable grounds to believe that the amount demanded is excessive." Id. at 388.
Seren maintains that CNA structured a settlement agreement that was prejudicial to Seren by refusing to settle all claims for an amount within the policy limits. According to Seren, CNA wrongfully limited coverage by refusing to settle the Robins plaintiffs' claims, regardless of whether the types of damages being sought were covered. We disagree. First, the uncontroverted record establishes that CNA sought to settle all claims and that the Robins plaintiffs refused to settle the punitive-damages claims during the negotiations that resulted in the compensatory-damages settlement. Second, claims for punitive damages were not covered by the policies. Short does not extend the duty to defend by creating a duty to settle all claims within the policy limits regardless of whether the policy provides coverage for a particular claim. Such an argument implies that the policy-coverage amount controls a determination of good faith rather than the policy language itself.
Seren argues that CNA concealed its intent to use the August 2001 settlement as the basis for refusing to contribute to the punitive-damages claims. But this argument is contrary to the record. Seren had notice that the Robins plaintiffs intended to seek punitive damages as early as May 4, 2001, when CNA informed Seren that it was negotiating with the Robins plaintiffs in the hopes of reaching a settlement. At that time, CNA advised Seren that the Robins plaintiffs were contemplating a claim for punitive damages and that such a claim was not covered under the Transcontinental policy. CNA also notified Seren that it intended to settle the compensatory-damages claims and sought contribution for settlement of any possible punitive-damages claims. Seren declined. Seren maintained that a punitive-damages claim had not been asserted, and because CCI was responsible for the accident, a punitive-damages claim against Seren would lack a basis in fact. Our careful review of the record establishes that there is no evidence to support Seren's claim that CNA concealed its position on punitive damages or its attempt to settle the compensatory-damages claims. As such, Seren has not established that a genuine issue of material fact exists as to whether CNA concealed its intentions in a manner that breached its duty to defend Seren.
Moreover, Seren has not established that the defense it received was prejudiced by CNA. If a complaint alleges numerous claims and any one of them would obligate the insurer to indemnify if liability is assessed, the insurer must provide a defense against all claims in the complaint. Reinsurance Ass'n of Minn. v. Timmer, 641 N.W.2d 302, 307 (Minn.App. 2002), review denied (Minn. May 14, 2002). Seren chose the Maslon firm as its defense counsel, and CNA did not interfere with Maslon's authority to act on Seren's behalf throughout the litigation. Although CNA claimed its duty to defend Seren would be complete with the settlement of the covered compensatory-damages claims in August 2001, CNA continued to pay for Maslon's defense of Seren until after the settlement with the Robins plaintiffs in December 2003. We agree with the district court that Seren received the defense to which it was entitled. CNA was entitled to settle its covered claims and notified Seren of its intention to do so. CNA did not breach its duty to defend Seren. Accordingly, the district court did not err by granting summary judgment to CNA.
B.
In its notice of review, CNA contends that the district court erred by failing to conclude, based on the principles articulated in Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411 (Minn. 1997), that CNA's duty to defend Seren ceased with the August 2001 circular-indemnification agreement for the Sandquist compensatory-damages claims. In Meadowbrook, the Minnesota Supreme Court held that an insurer who undertakes an insured's defense can "withdraw its defense once all arguably covered claims have been dismissed with finality." 559 N.W.2d at 416. "[A]n insurer cannot withdraw from a defense until its duty to defend all arguably covered claims has been completely extinguished — in other words, when no further rights to appeal those arguably covered claims exist." Id. at 417.
Based on the evidence presented here, Meadowbrook's holding does not compel the conclusion advanced by CNA. Because the circular-indemnification agreement did not release all compensatory-damages claims, it did not completely extinguish them or provide the requisite degree of finality as to Seren's arguably covered claims to meet the standard articulated in Meadowbrook. Moreover, because the record before us does not include a copy of the December 2003 settlement agreement, we have no basis to conclude that the settlement included an explicit release of all claims, including those for compensatory damages, such that the finality required to meet the Meadowbrook standard existed at that time. Thus, our ruling is confined to the conclusion that the duty to defend did not cease, as CNA argues, upon CNA's entry into the circular-indemnification agreement.
C.
Seren also challenges the district court's dismissal of the claims for breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing, arguing that they are distinct from the duty to defend. We address each claim in turn.
In the insurance context, a fiduciary duty arises out of the "`parties' unequal bargaining power and the nature of insurance contracts which would allow unscrupulous insurers to take advantage of their insureds' misfortunes in bargaining for settlement or resolution of claims.'" Kissoondath v. U.S. Fire Ins. Co., 620 N.W.2d 909, 915 (Minn.App. 2001) (quoting Arnold v. Nat'l County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987)), review denied (Minn. Apr. 17, 2001). When an insurer undertakes the defense of its insured for the claims covered by the insurance policy, the insurer owes its insured a fiduciary duty to represent the best interests of the insured and to defend and indemnify the insured on the covered claims. Short, 334 N.W.2d at 387.
The district court dismissed Seren's claim for breach of fiduciary duty, concluding that Seren had not alleged facts analogous to those in Short to support a separate cause of action for breach of fiduciary duty. Rather, the facts alleged established the basis for Seren's claims for breach of the duty to defend and breach of the duty to indemnify. On appeal, Seren also fails to identify factual allegations that support a separate cause of action for breach of fiduciary duty apart from the insurer's duty to defend. And Seren cites no authority expressly providing for a breach-of-fiduciary-duty claim under the facts alleged. Cf. Miller v. ACE USA, 261 F. Supp. 2d 1130, 1140-41 (D. Minn. 2003) (stating that parameters of fiduciary duty established in Short provide authority for breach-of-fiduciary-duty claim). This analysis is not inconsistent with other jurisdictions that describe the duty owed by an insurer to its insured as a "fiduciary duty to defend." See Black v. Allstate Ins. Co., 100 P.3d 1163, 1170 (Utah 2004) (describing insurer's "fiduciary duty to defend its insured" as "zealously protecting the interests of its insured in defending or negotiating settlement of the action"); Douglas v. Allied Am. Ins., 727 N.E.2d 376, 382 (Ill.App.Ct. 2000) ("An insurance company has a fiduciary duty to defend its insured and to consider the insured's interest."). We therefore conclude that the district court did not err by dismissing Seren's claim for breach of fiduciary duty.
Even if we were to conclude that Seren's breach-of-fiduciary-duty claim is a cause of action separate from that of breach of the duty to defend and breach of the duty to indemnify, Seren has not demonstrated that there is a material fact issue as to this claim. The insurer's fiduciary duty is measured by a standard of good faith, Kissoondath, 620 N.W.2d at 916, which is breached when "the insured is clearly liable and the insurer refuses to settle within the policy limits and the decision not to settle within the policy limits is not made in good faith," Short, 334 N.W.2d at 388. When viewed in the light most favorable to Seren, the record establishes that CNA (1) had a good faith reason to believe that the punitive damages claims were not covered by Seren's policies; (2) informed Seren of its intention to settle all covered claims; (3) invited Seren's participation in settlement negotiations to address punitive damages, which Seren declined; and (4) continued to fulfill its duty to defend Seren by paying for Seren's legal counsel through the final settlement with the Robins plaintiffs. Thus, dismissal of the breach-of-fiduciary-duty claim was proper.
Although Minnesota law recognizes that the implied covenant of good faith and fair dealing is included in every contract, In re Hennepin County 1986 Recycling Bond Litig., 540 N.W.2d 494, 502 (Minn. 1995), including insurance contracts, Short, 334 N.W.2d at 387-88, Minnesota law does not recognize a separate cause of action for breach of the implied covenant of good faith when it arises from the same conduct as a breach-of-contract claim, Wild v. Rarig, 302 Minn. 419, 441-42, 234 N.W.2d 775, 790 (1975). Accordingly, the district court did not err by dismissing Seren's claim for breach of the implied covenant of good faith and fair dealing.
III.
Seren next contends that CNA breached its duty to indemnify. "An insurer assumes two duties to its insured: the duty to defend and the duty to indemnify." St. Paul Fire Marine Ins. Co. v. Nat'l Chiropractic Mut. Ins. Co., 496 N.W.2d 411, 415 (Minn.App. 1993), review denied (Minn. Apr. 29, 1993). The duty to defend is distinct from and broader in scope than the insurer's duty to indemnify. Franklin, 574 N.W.2d at 406. Unlike the duty to defend, the duty to indemnify is triggered only when liability is assessed on a claim within the policy coverage. Timmer, 641 N.W.2d at 307-08.
Seren argues that it is entitled to indemnification for the punitive-damages claims. But CNA did not have a duty to indemnify Seren for punitive damages because the CNA insurance policies did not cover such claims. Because the CNA polices did not cover punitive damages as a matter of law, CNA did not breach its duty to indemnify Seren for the punitive-damages claims.
IV.
For the first time on appeal, CNA advances an alternate basis for summary judgment — that Seren refused to sign an updated loan-receipt agreement. This issue is not properly before us. Although the loan-receipt agreement is included in affidavits submitted to the district court in support of CNA's motion for summary judgment, a review of CNA's motion to dismiss and its motion for summary judgment does not establish that this issue was presented to the district court. And the district court did not address the loan-receipt agreement in its order on either motion.
We generally will not address matters that have not been argued and decided in the district court. Thiele v. Stich, 425 N.W.2d 580, 582 (Minn. 1988). Moreover, the record on this issue is not adequately developed for our review. On this record, we cannot discern whether CNA was entitled to summary judgment on this alternate basis. Accordingly, we decline to review this issue.