Roberts v. United States Fidelity & Guaranty Co.

[This opinion has been published in Ohio Official Reports at 

75 Ohio St.3d 630

.]




ROBERTS, TRUSTEE IN BANKRUPTCY FOR WIKEL MANUFACTURING COMPANY,
    INC., APPELLANT AND CROSS-APPELLEE, v. UNITED STATES FIDELITY &
            GUARANTY COMPANY, APPELLEE AND CROSS-APPELLANT.
       [Cite as Roberts v. United States Fid. & Guar. Co., 

1996-Ohio-101

.]
Insurance—Insurer does not act in bad faith in failure to defend insured in breach
        of distributorship contract action, when—Trial court’s determination of
        damages not disturbed, when—Allowance of setoff of damages reversed,
        when.
      (No. 94-2511—Submitted February 6, 1996—Decided June 26, 1996.)
          APPEAL and CROSS-APPEAL from the Court of Appeals for Erie County,
                                       No. E-93-35.
                                  __________________
        {¶ 1} On May 29, 1985, Nick and Elinor Miller filed a lawsuit against Wikel
Manufacturing Company, Inc. and David Wikel, individually (collectively,
“Wikel”), in which they alleged that Wikel had breached a distributorship contract.
Wikel was covered by comprehensive general liability insurance issued by appellee
and cross-appellant, United States Fidelity & Guaranty Company (“USF&G”). The
policies provided that USF&G had the “right and duty to defend any suit against
the Insured seeking damages on account of such bodily injury or property damage.”
USF&G assigned an attorney, William Pietrykowski, to defend the suit, but Wikel’s
own attorney, Gary Ebert, ended up filing all of the pleadings and otherwise
handling the defense. After trial, the Millers were awarded $1.5 million in damages
on their breach of contract claim.
        {¶ 2} The court of appeals reversed the verdict on the ground that the
doctrines of waiver and estoppel compelled a judgment in favor of Wikel. This
court reversed the court of appeals’ judgment, finding that Wikel did not raise
                             SUPREME COURT OF OHIO




waiver or estoppel in its answer or at any time and, thus, was barred from raising
those defenses. Miller v. Wikel Mfg. Co., Inc. (1989), 

46 Ohio St.3d 76

, 

545 N.E.2d 76

. This court also found that the court of appeals had erred in finding that the
contract was terminable at will, since Wikel had also waived its right to appeal that
issue.
         {¶ 3} Wikel subsequently filed a complaint for declaratory judgment and
money damages against USF&G in which it alleged that USF&G failed and refused
to defend Wikel and, as a result, it had a $1.5 million judgment entered against it
which forced it to file bankruptcy and sustain additional damages. The complaint
also alleged that Wikel’s own attorneys had committed malpractice in defending
the suit. The following pertinent evidence was adduced at trial.
         {¶ 4} Barbara Metusalem, a claims manager for USF&G, testified that
USF&G did not communicate to Wikel that USF&G had decided internally that
there was no coverage for the claims and that Pietrykowski would not be involved
in the case. Pietrykowski testified that although he had been assigned by USF&G
to defend the case, he did not assume the position as counsel for Wikel, as it
appeared that Wikel was well represented by Ebert and that Wikel had indicated
that it preferred to have its own attorney. George Paytas, Vice-President of Finance
for Wikel, testified that he never received a decision from USF&G on coverage for
the Millers’ claim or any indication that USF&G was limiting Pietrykowski’s
involvement or withdrawing its defense. Leland J. Welty, a C.P.A., testified that
the judgment and resulting bankruptcy caused Wikel losses totaling $8,206,099.
Linda Miller, an independent insurance agency associate who handled Wikel’s
claims with USF&G, testified that she did not receive the Miller pleadings from
Wikel until the fall of 1985, at which time she forwarded them immediately to
USF&G. Wikel admitted two reservation of rights letters from USF&G into
evidence, one dated December 16, 1985 and one dated August 29, 1986. The
December letter was addressed to Wikel Manufacturing Company and was sent to



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                                January Term, 1996




the attention of Paytas. It indicated that the intentional breach of contract claim
made against Wikel would not be covered and concluded, “These allegations make
it necessary to make our investigation and legal discovery under a strict reservation
of rights until all the facts are determined.” The August letter was sent to Wikel’s
attorney, Gary Ebert, and was copied to Wikel Manufacturing.               This letter
mentioned specific policy defenses and concluded with the statement, “[W]e are
undertaking defense of this matter under a strict reservation of rights ***.”
       {¶ 5} On December 10, 1992, the trial court filed its findings of fact,
conclusions of law and judgment entry, in which it held, in part, that USF&G had
a duty to defend Wikel in the Miller suit, and that as a proximate result of the breach
of the contractual duty to defend and/or the negligent performance of that duty,
Wikel sustained actual damages of $1.5 million, but that USF&G was entitled to a
setoff in the sum of $1 million due to Wikel’s settlement with the attorney
defendants. The trial court also, on June 7, 1993, issued an entry holding that
USF&G had not acted in bad faith toward its insured.
       {¶ 6} The court of appeals held that while the trial court properly set forth
this court’s standard for the recovery of compensatory damages in a bad faith tort
claim, enunciated in Motorists Mut. Ins. Co. v. Said (1992), 

63 Ohio St.3d 690

, 

590 N.E.2d 1228

, the trial court erred in also including language in its entry that set
forth the standard for an award of punitive damages in bad faith claims.
Accordingly, the court of appeals remanded the trial court’s finding that USF&G
did not act in bad faith to the trial court for consideration using the proper legal
standard.
       {¶ 7} This matter is now before this court upon the allowance of a
discretionary appeal and cross-appeal.
                                __________________
       Murray & Murray Co., L.P.A., Dennis E. Murray and Kirk J. Delli Bovi, for
appellant and cross-appellee.




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           Spengler Nathanson, James R. Jeffery, Teresa L. Grigsby and James D.
Jensen, for appellee and cross-appellant.
                                __________________
           FRANCIS E. SWEENEY, SR., J.
           {¶ 8} This court must determine whether the trial court properly made the
following findings: (1) that USF&G did not act in bad faith in breaching the duty
to defend Wikel; (2) that USF&G was entitled to a setoff; and (3) that Wikel was
entitled to only $1.5 million in damages for USF&G’s breach of its duty to defend.
For the following reasons, we uphold the trial court’s determination that USF&G
did not act in bad faith and, thus, we reverse that portion of the court of appeals’
judgment remanding this issue to the trial court for reconsideration. We reverse the
court of appeals’ allowance of a setoff of damages. Finally, we affirm the court of
appeals’ determination that Wikel is entitled to only $1.5 million in damages.
Accordingly, we affirm the judgment of the court of appeals in part and reverse it
in part.
           {¶ 9} Appellant, Wikel’s trustee in bankruptcy, argues that we should
remand this cause to the trial court for application of this court’s holding in Zoppo
v. Homestead Ins. Co. (1994), 

71 Ohio St.3d 552

, 

644 N.E.2d 397

, paragraph one
of the syllabus. While Zoppo involved an insurer’s bad faith failure to process a
claim, appellant argues that it should be extended to apply to cases involving bad
faith failure to defend. In Zoppo, we held, at paragraph one of the syllabus, that
“[a]n insurer fails to exercise good faith in the processing of a claim of its insured
where its refusal to pay the claim is not predicated upon circumstances that furnish
reasonable justification therefor.” In Zoppo we abandoned the intent requirement
of Motorists Mut. Ins. Co. v. Said (1992), 

63 Ohio St.3d 690

, 

590 N.E.2d 1228

. We
decline to extend Zoppo to this particular case of bad faith failure to defend, as
Zoppo was decided after the trial court’s and court of appeals’ decisions in this case.




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                                     January Term, 1996




This case has been litigated for over ten years and should come to final resolution
before this court.1
         {¶ 10} The trial court found that USF&G did not act in bad faith, applying
the intent requirement of 

Said, supra.

 In support of this finding, the trial court cited
the definition of “bad faith” set forth in Said, which included the requirement that
in order to demonstrate bad faith, “wrongful intent” must be proven. The court
noted that “[i]t is not enough that the insurance company exercised poor judgment
or even that it acted recklessly.” While the trial court’s entry erroneously included
language setting forth the standard for an award of punitive damages in bad faith
claims, we find that the inclusion of this language was harmless here,. as the entry
indicates that this was merely an additional reason for finding no bad faith. Thus,
regardless of the inclusion of this erroneous language, we believe that the trial court
found no bad faith under the properly cited definition articulated in 

Said, supra.

 In
fact, the trial court concluded that it found no bad faith “under the standards
articulated by the Ohio Supreme Court.” Accordingly, we find it unnecessary to
remand this matter to the trial court for reconsideration of this finding.
         {¶ 11} We must next address whether USF&G was entitled to a setoff in the
amount of $1 million by virtue of Wikel’s settlement in that amount with Wikel’s
own counsel. A setoff was improper here, as Wikel’s professional negligence claim
against its own counsel was separate and distinct from Wikel’s breach of contract
claim against USF&G. The attorney-client relationship between Wikel and its
separate counsel arose out of a particular contract. The insured-insurer relationship
between Wikel and USF&G arose out of a completely separate and distinct
contract. The insurer, USF&G, and Wikel’s separate counsel had no relationship
with each other and no determination was ever made that Wikel’s separate counsel


1. While we decline to extend Zoppo to this particular case of bad faith failure to defend, we leave
it open as to whether Zoppo may be applied to future cases.




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in the Miller action bore any responsibility for the damages which the trial court
awarded against USF&G in the instant case. Accordingly, we reverse the court of
appeals’ finding that the trial court properly allowed the setoff.
        {¶ 12} Appellant next argues that the trial court erred in awarding only $1.5
million in damages (the Miller judgment), as it demonstrated that the Miller
judgment was the reason it had to eventually seek bankruptcy protection, which led
to the demise of the business and an $8,206,099 economic loss to the company. We
will not disturb a decision of the trial court as to a determination of damages absent
an abuse of discretion. Blakemore v. Blakemore (1983), 

5 Ohio St.3d 217, 219

, 5
OBR 481, 482, 

450 N.E.2d 1140, 1142

. While the trial court did not state its reason
for allowing $1.5 million as compensatory damages, we agree with the court of
appeals that the trial court must have found that these additional debts (or losses)
were remote, speculative, and not supported by the evidence. The appellate court
found that Wikel was entitled to recover only those damages which could
reasonably be considered as arising naturally from USF&G’s breach of the duty to
defend. The appellate court then affirmed the trial court’s damages, concluding
that “the trial court’s finding that the actual damages sustained by Wikel as a direct
result of USF&G’s contractual breach of its duty to defend Wikel was $1.5 million
is supported by the evidence.” We agree with both lower courts that the alleged
$8.2 million loss could not have been seen to arise from the $1.5 million judgment
against Wikel.2 Accordingly, we affirm the court of appeals’ finding that the trial
court’s determination of damages was not against the manifest weight of the
evidence.
                                                                Judgment affirmed in part
                                                                      and reversed in part.


2. Wikel’s amended complaint prayed for $7 million in damages and, thus, the most it would have
been entitled to is that amount of damages.




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                                  January Term, 1996




          MOYER, C.J., DOUGLAS and GRADY, JJ., concur.
                                  __________________
          PFEIFER, J., concurring in part and dissenting in part.
          {¶ 13} I concur but would allow a setoff of the amount of the Ebert
settlement and therefore agree in part with Justice Cook’s dissenting opinion.
          PETREE and COOK, JJ., dissent.
          CHARLES R. PETREE, J., of the Tenth Appellate District, sitting for WRIGHT,
J.
          THOMAS J. GRADY, J., of the Second Appellate District, sitting for RESNICK,
J.
                                  __________________
          COOK, J., dissenting.
          {¶ 14} I concur with the decision of the majority upholding the trial court’s
decision that the plaintiff did not prove the tort of bad faith. I would, however,
reverse the court of appeals’ decision on the claim for breach of the contract to
defend, as I believe that there simply is no causal connection between Wikel’s
damages, that is, the Miller judgment, and USF&G’s alleged breach of the duty to
defend.
          {¶ 15} This case does not involve coverage issues. Instead, the only legal
basis for attaching liability to USF&G for the Miller judgment is through a theory
of a breach of the duty to defend. Wikel concedes in its reply brief that a breach of
the duty to defend may not create coverage where none otherwise exists. Thus,
without a right to coverage, the only way USF&G can be liable to pay the amount
of the judgment is if it is determined that USF&G breached a duty to defend and
that breach proximately caused the judgment to be rendered against the insured.
          {¶ 16} Yet, the coverage issue is important, as it triggered the insured’s
option to retain personal counsel and control the defense. USF&G, although having
agreed to provide a defense under a reservation of rights, did not defend the case.




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The reservation of rights letters introduced at trial put Wikel on notice of the
potential that it might have direct exposure on the Miller complaint. That Wikel
understood this potential is evident from its initial and continued retention of Ebert
to act as defense counsel. Ebert, as Wikel’s own attorney, took the case to trial,
apparently with no objection from Wikel. It was the legal strategy of Ebert that
ultimately caused the judgment in favor of          the Millers. And it is Ebert’s
malpractice, for which Wikel received a $1 million settlement, not the breach of the
duty to defend by USF&G, that resulted in the damages Wikel now seeks to pass
on to USF&G.
       {¶ 17} The wrongdoing by USF&G, according to the facts evinced at trial,
was that it assigned an attorney to the defense of the Miller claim and never
formally revoked that assignment. Yet, counsel is presumed competent and Wikel
was represented in this claim by competent counsel of its choosing. Maybe Wikel
could have claimed against USF&G for the cost of its defense. But it cannot
reasonably claim as damages the amount of the Miller judgment by saying that the
judgment directly and proximately flowed from the fact that particular counsel,
USF&G’s assigned counsel, did not defend the case.
       {¶ 18} For the foregoing reasons, I would reverse the judgment that Wikel’s
damages in the amount of $1,500,000 directly resulted from breach of USF&G’s
duty to defend. Moreover, even assuming arguendo that the judgment amount
could be attributed to the breach of the duty to defend, I would agree with the court
of appeals that the amount of the Ebert settlement should be set off from the
judgment rendered against USF&G for the same injury.
       PETREE, J., concurs in the foregoing dissenting opinion.
                               __________________




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