Opinion
No. C1-00-1498; C3-00-1499.
Filed April 17, 2001.
Appeal from Stearns County District Court, File No. C4-99-3419.
Steven D. Pattee, Waldeck Lind, P.A., (for Britamco Underwriters, Inc.)
Amy J. Doll, Fleugel, Helseth, McLaughlin, Anderson Brutlag, Chartered, (for Thomas Eul)
Thomas P. Melloy, Hall Byers, P.A., (for A A Liquors of St. Cloud, Inc. and A A Liquor, Inc.)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2000).
UNPUBLISHED OPINION
An injured party brought a dram shop action, and a default judgment was entered against the bar when it failed to respond. Shortly thereafter, the bar notified its insurer of the claim. The insurer sought a judgment declaring that it was not responsible for the claim, and the district court agreed. We reverse.
FACTS
In June 1998, Thomas Eul sued Tom's 9th Avenue Bar (Tom's Bar), Centennial Liquor Shoppe (Centennial), Eugene Myers, David Williams, and Allen Smith, alleging assault and battery by Myers, Williams, and Smith and dram shop liability on Tom's Bar and Centennial. At the time of the incident, Britamco Underwriters, Inc. (Britamco) insured Tom's Bar for claims arising under the Minnesota Civil Damages Act, pursuant to a liquor liability policy. After attempting service by publication and receiving no response from Tom's Bar, Eul obtained a default judgment on November 12, 1998 against Tom's Bar for $227,839.56.
Tom's Bar learned of the default judgment and, on November 20, 1998, notified the claims department for Britamco, which then retained attorneys to defend the action. Britamco filed an answer and crossclaim on December 7, 1998.
Tom's Bar moved the court to vacate the default judgment, but on March 16, 1999, the district court denied that motion, finding that Tom's Bar was given notice of the claim on September 10, 1997.
On appeal, we found that service occurred on September 17, 1997. Eul v. A A Liquors of St. Cloud, Inc., No. C6-99-517, (Minn.App. Oct. 12, 1999).
On July 22, 1999, Britamco sought a judgment declaring that it was not responsible for defending or indemnifying the underlying claim. Eul intervened to defend against this action. The district court granted summary judgment in favor of Britamco, finding that Britamco had sustained actual prejudice due to the failure of Tom's Bar to notify it of the claim in a timely manner. Following the summary judgment order, Britamco moved for supplemental relief in the form of attorney fees for both this action and the underlying action. The district court denied this motion. Eul and Tom's Bar appeal the summary judgment order, and Britamco filed a notice of review of the denial of its motion for attorney fees.
DECISION Duty to Defend and Indemnify
The district court's award of summary judgment was premised on its conclusion that Britamco was prejudiced as a matter of law by the default judgment in the underlying case. "On appeal from summary judgment, we ask two questions: (1) whether there are any genuine issues of material fact and (2) whether the lower courts erred in their application of the law." State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990).
Eul and Tom's Bar argue that Britamco is estopped from denying coverage because it defended the case upon notification. "If an insurer, with full knowledge of the facts of a claim, defends its insured without reserving its rights to deny coverage, the insurer may be estopped later to deny coverage." Mutual Service Cas. Ins. Co. v. Luetmer, 474 N.W.2d 365, 368 (Minn.App. 1991). Britamco argues that it implicitly reserved its rights by filing this declaratory judgment action on July 22, 1999, and did so explicitly in a letter dated September 30, 1999. But this reservation of rights occurred almost eight months after it filed its answer and crossclaim in the underlying matter. A reservation of rights must be made in a timely fashion "on peril of estoppel." See Meirthew v. Last, 135 N.W.2d 353, 355 (Mich. 1965) (holding that insurance company's reservation of rights letter sent several years after action was commenced came too late to avoid presumptive prejudice of both the insured's and, consequently, the plaintiff's rights especially considering the lack of loyalty suggested by such delay). The delay in the instant case was both without justification and prejudicial.
Here, Tom's Bar had no reason to believe that Britamco would challenge its duty to defend until Britamco filed its declaratory judgment complaint eight months later. This delay is simply too long. In the interim, Britamco's unqualified offer of defense has undoubtedly affected Tom's Bar's settlement posture. See, e.g., Oehme v. Johnson, 181 Minn. 138, 151, 231 N.W. 817, 822 (1930) (stating that courts hold with practical unanimity that an insurer cannot undertake a defense, thereby affecting the decision to settle, and then later deny coverage). If, at the time of tendering a defense, Britamco had reserved its rights, it could be said that Tom's Bar, in accepting the offer of defense, acquiesced to the defense's provisional nature. See, e.g., Knapp v. Commonwealth Land Title Ins. Co., 932 F. Supp. 1169, 1172 (D.Minn. 1996) (insurer permitted to recover costs associated with defense later judged to be unnecessary when insurer adequately reserved its rights and defendant acquiesced to the provisional defense). But Tom's Bar was not given that opportunity to decide whether to accept such an offer until eight months into the litigation. Because Britamco did not reserve its rights in a timely manner, it is now estopped from denying coverage.
Because we conclude that Britamco is estopped from denying coverage, we decline to address the theoretical question of whether Britamco's duty to defend and indemnify was obviated by the default judgment.
Attorney Fees
The district court declined to award fees and costs to Britamco for the underlying action and did not address attorney fees on the declaratory action. Although Britamco argues it is entitled to such fees, the decision to award or deny attorney fees is discretionary. Katz v. Katz, 408 N.W.2d 835, 840 (Minn. 1987). The district court pointed to Britamco's failure to provide a timely reservation of rights in support of its decision to not award attorney fees. This conclusion is substantiated by the record and is not an abuse of the district court's discretion.
Britamco argues that attorney fees are recoverable under Minn. Stat. § 555.08 (2000), which provides for supplemental relief, "whenever necessary or proper." But, in this case, this statute cannot be extended to provide for attorney fees absent a breach of a contractual duty. Garrick v. Northland Ins. Co., 469 N.W.2d 709, 714 (Minn. 1991). Britamco argues that Tom's Bar breached a contractual duty by failing to notify Britamco of the claim asserted by Eul. But the duty to notify the insurance company is not a contractual obligation per se. Rather, it is a condition precedent to the insurance company's obligation to defend and indemnify, and is specifically labeled as such in the insurance policy. Furthermore, even if the duty to notify were a contractual obligation, the power to grant attorney fees in breach of contract situations is discretionary, and we find no abuse of that discretion.