Peerless Insurance Co. v. Frederick

Peerless Insurance Co. v. Frederick  (2003-039); 177 Vt. 441; 869 A.2d 112

2004 VT 126

[Filed 23-Dec-2004]

  NOTICE:  This opinion is subject to motions for reargument under V.R.A.P.
  40 as well as formal revision before publication in the Vermont Reports. 
  Readers are requested to notify the Reporter of Decisions, Vermont Supreme
  Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
  order that corrections may be made before this opinion goes to press.


                                 2004 VT 126

                                No. 2003-039


  Peerless Insurance Company                    Supreme Court

                                                On Appeal from
       v.                                       Bennington Superior Court


  Robert J. Frederick and                       April Term, 2004
  Young Buck Enterprises, Inc.


  John P. Wesley, J.

  Pietro J. Lynn and Jennifer G. Mihalich of Lynn & Associates, P.C.,
  Burlington, for Plaintiff-Appellee.

  John Paul Faignant of Miller Faignant & Behrens, P.C., Rutland, for
  Defendant-Appellant.


  PRESENT:  Amestoy, C.J. (FN1),  Dooley, Johnson, Skoglund and Reiber, JJ.


       ¶  1.     SKOGLUND, J.    This action involves various insurance
  claims resulting from a fire that destroyed a building in which appellant,
  Young Buck Enterprises (Young Buck), operated the Bennington Station
  Restaurant.  Young Buck leased the property from MacDonald & Secor Realty,
  Inc. (M&S).  The suit began as a subrogation action between M&S's insurer,
  Peerless Insurance Company (Peerless), and the lessee, Young Buck.  Young
  Buck denied liability and counterclaimed, alleging fraudulent inducement to
  purchase insurance, wrongful denial of insurance coverage, and insurer bad
  faith based on the filing of a subrogation action.  Peerless eventually
  withdrew its subrogation claims, leaving only Young Buck's counterclaims. 
  Peerless moved for summary judgment on all of Young Buck's claims, and the
  trial court granted the motion.  Young Buck appeals from the trial court's
  decision on its claims of wrongful denial of coverage and insurer bad
  faith.  We affirm. 

       ¶  2.     The undisputed facts, as found by the trial court, are as
  follows.  On February 24, 2000, a fire destroyed the property rented by
  Young Buck at 150 Depot Street in Bennington, Vermont.  Pursuant to the
  lease between M&S and Young Buck, Young Buck had purchased an insurance
  policy through Peerless's local insurance agent, the Wills Agency.  This
  policy, the so-called Commercial Lines Package, provided both Young Buck
  and M&S with commercial property, commercial general liability, flood,
  crime, and liquor liability insurance.  

       ¶  3.     Another policy was purchased from Peerless that provided
  M&S, as the only named insured, with fire insurance.(FN2) In the beginning
  of the rental relationship, M&S paid the premiums on this fire insurance
  policy and then sought reimbursement from Young Buck.  Eventually, Young
  Buck began paying the fire insurance premiums directly to the Wills Agency.  
   
       ¶  4.     Young Buck was frequently dilatory in making the premium
  payments on the Commercial Lines policy.  As a result, Peerless had sent
  cancelation notices to Young Buck on several occasions.  Usually, Young
  Buck responded to these notices by making the premium payments before the
  cancelation date.  On occasion, Young Buck did not make payment until after
  Peerless had canceled the policies.  Prior to the fire that prompted this
  suit, Peerless reinstated the policies after each cancelation following
  Young Buck's representation that it had not sustained an intervening loss. 

       ¶  5.     On January 31, 2000, Peerless sent a notice of cancelation
  to Young Buck for nonpayment of the Commercial Lines Package premium. 
  According to the notice, the policy would be canceled effective February
  17, 2000, if payment was not received by that date.  On two separate
  occasions, the Wills Agency contacted Young Buck and reminded the company
  that payment was due.   When Peerless did not receive payment by February
  17, 2000, it canceled the Commercial Lines policy.  At that time, the
  separate fire policy, which Young Buck was required to maintain for the
  benefit of M&S, was in place with all premium payments current. 

       ¶  6.     On February 24, 2000, shortly before 9:30 a.m., a fire broke
  out at the Bennington Station Restaurant.  As fate would have it, at
  approximately the same time, one of Young Buck's employees came to the
  Wills Agency and dropped off a check payable to Peerless for the
  outstanding premium payment.  Peerless declined to reinstate the canceled
  Commercial Lines policy, and the Wills Agency returned the check to Young
  Buck on February 25, 2000.

       ¶  7.     Peerless paid approximately $90,000 in losses to M&S
  pursuant to the fire insurance policy.  As part of processing the claim for
  fire damages, Peerless hired a cause and origin expert who concluded that
  Young Buck's misuse of a laundry dryer was the source of the fire. 
  Peerless also reviewed the lease between Young Buck and M&S and was advised
  by counsel that the lease contained no provisions precluding subrogation. 
  Hence, Peerless initiated a subrogation action against Young Buck as a
  third-party tortfeasor to recover the money paid to M&S.  In an amended
  complaint, Peerless added two contractual claims concerning insurance
  premiums it alleged remained due and owing under the canceled Commercial
  Lines policy.  
   
       ¶  8.     Young Buck filed a three-count counterclaim wherein it
  alleged that Peerless: (1) wrongfully denied Young Buck insurance coverage
  under the Commercial Lines policy; (2) fraudulently induced Young Buck to
  purchase insurance by misrepresenting its cost; and (3) acted in bad faith
  by bringing a subrogation action.  When, during the discovery process,
  Peerless learned that Young Buck was paying the premiums for M&S's fire
  insurance coverage directly, Peerless voluntarily dismissed its subrogation
  claims.  The trial court granted Young Buck's motion for summary judgment
  on Peerless's contractual claims, so that only Young Buck's counterclaims
  remained.

       ¶  9.     Young Buck then moved for summary judgment on the narrow
  issue of whether, as a lessee, it was a coinsured under M&S's fire
  insurance policy.  The court concluded that Young Buck was implicitly a
  coinsured under the lease agreement, which contained a mutual waiver of
  subrogation and required Young Buck to pay M&S's fire insurance premiums. 
  Peerless then moved for summary judgment on Young Buck's three
  counterclaims, which the court granted.  Young Buck appeals as to its first
  and third counterclaims.

       ¶  10.     In reviewing an order granting summary judgment, we apply
  the same standard of review as that applied by the trial court.  Doe v.
  Forrest, 2004 VT 37, ¶ 9, 15 Vt. L. Wk. 125, 853 A.2d 48.  Summary judgment
  is appropriate where there is no genuine issue of material fact and the
  moving party is entitled to judgment as a matter of law.  Id.  In applying
  this standard, we give the nonmoving party the benefit of all reasonable
  doubts and inferences.  Id.
   
       ¶  11.     On the question of whether Peerless wrongfully denied Young
  Buck insurance coverage under the Commercial Lines policy, the court found
  it undisputed that Peerless mailed the notice of cancelation on January 31,
  2000, and then, when no premium was paid, canceled Young Buck's policy on
  February 17, 2000.  Further, the court found that no "course of dealing"
  modified the policy terms or allowed Young Buck to ignore the notice of
  cancelation.  It concluded that Young Buck could have no reasonable
  expectation that Peerless would reinstate the policy upon late payment
  simply because it had, in the past, done so upon a representation from the
  insured that it had not sustained any intervening losses.  The court
  concluded that Peerless properly canceled Young Buck's coverage under the
  Commercial Lines policy by giving the required statutory notice, see 8
  V.S.A. § 4712(a) (requiring forty-five days' notice to cancel in general,
  or fifteen days' notice if cancelation is for nonpayment of the premium),
  and by complying with policy language identical to the statutory
  requirement.  On appeal, Young Buck presents no cogent argument concerning
  any alleged errors in the trial court's decision on this issue.  We find no
  error in the court's analysis and hold that Peerless properly canceled the
  Commercial Lines policy and thus properly denied Young Buck coverage
  thereunder. 

       ¶  12.     Having found that Young Buck was not entitled to coverage
  under the canceled Commercial Lines Package, the trial court concluded that
  Peerless was entitled to summary judgment on Young Buck's counterclaim for
  insurer bad faith, whether premised on tort or contractual liability.  In
  the counterclaim, Young Buck alleges bad faith as follows: 

       20.     The Plaintiff Peerless has engaged in a course of
       conduct whereby in situations where it insures both parties
       to a loss, it denies coverage to the insured it feels is
       responsible for the loss, pays the other insured, and then
       demands payment from its insured to whom it denied coverage.  

       . . . .

       21.     The conduct of the Peerless Insurance Company up
       to this present time, and continuing during the course of
       this litigation constitutes both contractual and insurance
       bad faith and renders the Peerless Insurance Company liable
       for punitive damages.  
       
  Claiming it was an insured under both the Commercial Lines policy and the
  fire insurance policy issued to M&S, Young Buck challenges the trial
  court's ruling that Peerless did not engage in bad faith by filing a
  subrogation action. 

       ¶  13.     Vermont recognizes a claim for tortious bad faith brought
  by an insured against its own insurer when an insurer not only errs in
  denying coverage, but does so unreasonably.  Bushey v. Allstate Ins. Co.,
  164 Vt. 399, 402, 670 A.2d 807, 809 (1995).  To establish a claim for bad
  faith, a plaintiff must show that (1) the insurer had no reasonable basis
  to deny the insured the benefits of the policy, and (2) the company knew or
  recklessly disregarded the fact that it had no reasonable basis for denying
  the insured's claim.  Id.  As a necessary prerequisite, however, the
  plaintiff and defendant must have an insured/insurer relationship by virtue
  of a policy.  Kirkpatrick v. Merit Behavioral Care Corp. 128 F. Supp. 2d 186, 191 (D. Vt. 2000).

       ¶  14.     Vermont also recognizes a contractual bad faith claim based
  on a violation of the covenant of good faith and fair dealing.  "The
  implied covenant of good faith and fair dealing exists to ensure that
  parties to a contract act with 'faithfulness to an agreed common purpose
  and consistency with the justified expectations of the other party.' " 
  Carmichael v. Adirondack Bottled Gas Corp., 161 Vt. 200, 208, 635 A.2d 1211, 1216 (1993) (quoting Restatement (Second) of Contracts § 205 cmt. a
  (1981)).  However, in Carmichael, we noted "an action for . . . breach [of
  a covenant] is really no different from a tort action, because the duty of
  good faith is imposed by law and is not a contractual term that the parties
  are free to bargain in or out as they see fit."  Id. 
   
       ¶  15.     Whether the claim is for tortious or contractual bad faith,
  an insured/insurer relationship is still a prerequisite to sustain the
  claim.  The overwhelming majority of jurisdictions follow exactly the same
  rule Vermont does: the duty of good faith and fair dealing "arises solely
  because of the presence of the insurance contract."  Greene v. Stevens Gas
  Serv., 2004 VT 67, ¶ 25, 15 Vt. L. Wk. 207, 858 A.2d 238; see Lowe v. Am.
  Med. Int'l, 494 So. 2d 413, 414 (Ala. 1986) ("The cause of action for the
  tort of bad faith refusal to pay was created to protect only the person for
  whose benefit the insurance payments should have been made."); Soto v.
  Royal Globe Ins. Co., 229 Cal. Rptr. 192, 197 (Ct. App. 1986) ("One who is
  not a party to the insurance contract and the accompanying implied covenant
  of good faith and fair dealing may not maintain an action for breach of the
  covenant."); United Fire Ins. Co. v. McClelland, 780 P.2d 193, 198 (Nev.
  1989) ("[A] wife's coverage as a dependent under her husband's health
  insurance policy does not give her standing to enforce her husband's
  contract rights for bad faith denial of health care benefits.");
  Vecchiarelli v. Cont'l Ins. Co., 628 N.Y.S.2d 892, 893 (App. Div. 1995)
  (upholding the dismissal of a spouse's claim for bad faith where no
  contractual nexus was present); see also Correa v. Pa. Mfrs. Ass'n Ins.
  Co., 618 F. Supp. 915, 929 (D. Del. 1985) (finding that the duty of good
  faith and fair dealing does not extend to the spouse of someone insured
  under a workers' compensation policy); Transp. Ins. Co. v. Archer, 832 S.W.2d 403, 405 (Tex. App. 1992) (disallowing a spouse's suit for bad faith
  when her husband was denied benefit payments from his workers' compensation
  carrier).

       ¶  16.     Here, the trial court concluded that because Peerless
  properly canceled the Commercial Lines policy prior to the fire, Young Buck
  lacked the necessary insured/insurer relationship with Peerless and thus
  could not sustain a bad faith claim under that policy.  The court further
  held as a matter of law that, "[l]ike Young Buck's insurer bad faith claim,
  the existence of an insurer/insured relationship, in this case a contract,
  is a necessary prerequisite to a contractual bad faith claim. . . . Thus,
  for the same reasons that are fatal to the claim for tortious bad faith,
  the absence of any contractual relationship dooms Young Buck's claim for
  contractual bad faith."  We agree.  
   
       ¶  17.     However, Young Buck also argues that, even if the
  Commercial Lines policy no longer provided coverage when the fire occurred,
  Young Buck can still bring a bad faith claim against Peerless for
  initiating the subrogation action against an additional insured or
  coinsured under M&S's fire insurance.  The trial court noted that Young
  Buck's status as a coinsured had limited effect on the claims remaining in
  the case after Peerless dismissed its subrogation cause of action. 
  Further, it found that Young Buck could establish no set of facts to
  support its claim of bad faith arising from Peerless's election to initiate
  the subrogation action.  The court held that Peerless had made a reasonable
  inquiry regarding the factual and legal foundation of its subrogation claim
  prior to filing suit.  Noting that, at the time of its decision, the legal
  doctrine of "implied co-insurance" was unsettled in Vermont, the court
  concluded that there was "no evidence that Peerless acted in such a
  recklessly unreasonable way as to support a bad faith claim."  We agree
  that the evidence did not support a claim of bad faith against Peerless,
  and, therefore, that the trial court properly dismissed Young Buck's bad
  faith claim. 

       Affirmed.     


  FOR THE COURT:



  _______________________________________
  Associate Justice

------------------------------------------------------------------------
                                  Footnotes

FN1.  Chief Justice Amestoy sat for oral argument but did not participate in
  this decision.

FN2.  Though the trial court found that Young Buck purchased this fire
  insurance policy, the evidence on this point is not clear.  However, it is
  clear that M&S is the only named insured on this policy and, pursuant to an
  agreement between M&S and Young Buck reached at the time the lease was
  signed, Young Buck paid the premiums for this policy.