Vermont Insurance Management, Inc. v. Lumbermens' Mutual Casualty Co.
Annotate this Case
Vermont Insurance Management, Inc. v. Lumbermens' Mutual Casualty Co. (99-090);
171 Vt. 601; 764 A.2d 1213
[Filed 7-Nov-2000]
ENTRY ORDER
SUPREME COURT DOCKET NO. 1999-090
MARCH TERM, 2000
Vermont Insurance Management, Inc. } APPEALED FROM:
}
}
v. } Washington Superior
}
Lumbermens' Mutual Casualty Company }
} DOCKET NO. 418-7-93 Wncv
Trial Judge: Matthew I. Katz
In the above-entitled cause, the Clerk will enter:
Plaintiff/insured Vermont Insurance Management Company (VIM) appeals
from a grant of summary judgment in favor of defendant/insurer Lumbermens'
Mutual Casualty Company (Lumbermens). Plaintiff filed this suit against
defendant for insurance coverage and tort damages for insurance bad faith
in connection with a lawsuit against plaintiff brought by one of its former
employees. The trial court granted summary judgment because it found there
was no coverage and, therefore, no bad faith claim either. Plaintiff
argues on appeal that (1) defendant waived its right to deny coverage
under the terms of a non-waiver agreement, (FN1)(2) the court erred in
finding that because the gravamen of the employee's suit was sexual
harassment, no coverage existed under plaintiff's insurance policies, (3)
the court erred in finding that the employee's claims were not covered
under plaintiff's workers compensation policy, and (4) the court erred in
finding that because defendant had no duty to indemnify plaintiff,
plaintiff had no viable bad faith claims. We affirm.
In 1990, Betty Wood filed a complaint in the Washington Superior
Court, alleging that she and John Middleton were employees of VIM, and
that Middleton held a supervisory position. The Wood complaint asserted
that Middleton had sexually harassed Wood, that VIM had knowingly tolerated
the harassment, and that Middleton's and VIM's conduct amounted to sex
discrimination, negligent and/or intentional infliction of emotional
distress, civil assault and battery, a constructive and wrongful
discharge, and an invasion of privacy.
VIM notified Lumbermens of Wood's claims. At the time, VIM maintained
a general insurance policy (business owner's policy) and a workers'
compensation and employer's liability insurance policy with Lumbermens.
Lumbermens initially denied coverage for the sexual
harassment/constructive discharge claim under VIM's business owner's
policy. It opened a claim
file under the workers' compensation/employers liability insurance policy,
and informed VIM that coverage under that policy was being reviewed. It
also informed the parties that if Wood wished to pursue any claims through
the workers' compensation system, she needed to file a claim with the
Vermont Department of Labor and Industry. She never did so. Later,
Lumbermens agreed to provide VIM a defense of the Wood litigation under
the terms of a written non-waiver agreement, which was signed by VIM. The
non-waiver agreement states: "No action of [Lumbermens] pursuant to this
Agreement shall in any way be construed as a waiver or estoppel or as an
admission of coverage under the policies." Lumbermens retained attorney
Lawrence Miller, who defended the Wood litigation for VIM from 1990
through 1992.
At the end of 1992, settlement negotiations began when Wood announced
a settlement demand of $60,000. VIM initially demanded that Lumbermens
contribute $45,000 to such a settlement; Lumbermens, stating that there
were still "serious coverage questions," offered to contribute $5,000. As
settlement negotiations continued, VIM demanded that Lumbermens contribute
$25,000. When Lumbermens offered to contribute $20,000, VIM refused, and
instead settled the Wood litigation for $45,000 with its own funds. VIM
then sued Lumbermens for breach of contract and bad faith for its refusal
to indemnify VIM for the settlement.
This court reviews a motion for summary judgment using the same
standard as the trial court. O'Donnell v. Bank of Vermont, 166 Vt. 221,
224, 692 A.2d 1212, 1214 (1997). Thus, we will affirm a grant of summary
judgment where there are no genuine issues of material fact and the movant
is entitled to a judgment as a matter of law. V.R.C.P. 56(c)(3).
We first address plaintiff's argument that defendant waived any
exclusions to coverage by failing to effectively reserve its right to
later deny coverage. Defendant agreed to defend the Wood suit under the
terms of a written non-waiver agreement. Plaintiff signed the non-waiver
agreement, which provided that the defense would be undertaken "without
waiver of any right or admission of any obligation under the policies."
Plaintiff cites to several Vermont cases which have held that when an
insurer with full knowledge of the facts affecting coverage elects not to
take advantage of an exclusion, the insurer waives the right to later deny
coverage. See, e.g., Pellon v. Connecticut Gen. Life Ins. Co., 105 Vt.
508, 522, 168 A. 701, 707 (1933).
The cases cited by plaintiff are inapposite. We have long recognized
that a bilateral reservation of rights agreement prevents a waiver of the
right to dispute coverage. Beatty v. Employers' Liability Assurance Co.,
106 Vt. 25, 34, 168 A. 919, 923 (1933); see also Jefferson Ins. Co. v.
Travelers Ins. Co., 159 Vt. 46, 50-51, 614 A.2d 385, 388 (1992). The
agreement in this case effectively reserved defendant's right to dispute
coverage.
Plaintiff's second argument on appeal relates to the business owner's
policy. Plaintiff does not dispute the court's finding that Wood's sexual
harassment claim was not covered by the business owner's policy, but
argues that she advanced in her complaint three other causes of action that
were covered under that policy: libel and slander, invasion of privacy,
and harassment. Plaintiff argues that if any covered claim were included
in Wood's complaint, defendant would be responsible for the entire
settlement amount even if most of the claims were uncovered.
Defendant first responds that plaintiff cannot make this claim because it
settled without defendant's consent. It relies on policy language that
the insurer is not responsible unless its obligation to pay has been
"finally determined either by judgment against the insured after actual
trial or by written agreement of the insured, the claimant and the
company." We recognize that plaintiff settled without defendant's
consent, and the settlement deprived defendant of the ability to determine
what portion of Wood's damages are attributable to covered, and uncovered,
claims. We also recognize, however, that plaintiff faced a situation of
great risk if it went to trial and the judgment was not covered by
insurance.
In this case, both defense counsel originally employed by defendant
for plaintiff and plaintiff's own counsel advised that Wood's action
should be settled. Defendant was aware that plaintiff's counsel was
pursuing settlement, and it considered, and rejected, plaintiff's demand
that it contribute $25,000 to the settlement, offering $20,000 instead.
Under these circumstances, we can not say as a matter of law that
defendant can rely on the policy provision. See, e.g., Gates Formed Fibre
Products, Inc. v. Imperial Cas. & Indemnity Co., 702 F. Supp. 343, 347-48
(D. Me. 1988).
We do agree with defendant, however, that defendant is liable only for
the amount it would have paid in a reasonable, good faith settlement of
any covered claims. Zurich Ins. Co. v. Killer Music, Inc., 998 F.2d 674,
679 (9th Cir. 1993) (when insured settles claim without consent of
insurer, insurer liable only for amount that would be paid in reasonable,
good faith settlement). Further, defendant is liable only for covered
claims. See Enserch Corp. v. Shand Morahan & Co, 952 F.2d 1485, 1494 (5th
Cir. 1992); McDowell-Wellman Engineering Co. v. Hartford Acc. & Indem.
Co., 711 F.2d 521, 528 (3d Cir. 1983); Keeler Ind., Inc. v. Employers Mut.
Liability Ins. Co., 429 So. 2d 779, 780 (Fla. Dist. Ct. App. 1983); SL
Indus. v. American Motorists, 591 A.2d 677, 682 (N.J. Super. Ct. App. Div.
1991), aff'd and modified, 607 A.2d 1266 (N.J. 1992). Thus, account must
be taken of the likelihood of a finding against VIM, as well as the
coverage of any ultimate finding of liability.
Defendant has not disputed the reasonableness of the overall
settlement amount; instead, it has argued that no part of that settlement
is attributed to covered claims. In effect, the court agreed by
concluding that the claims that plaintiff now finds in the Wood's complaint
were either not there or would not have withstood a motion to dismiss on
the pleadings.
We agree that the covered claims now relied upon by plaintiff cannot
be said to have any effect on a reasonable settlement amount because they
were asserted only as a component of the sexual harassment claim and would
not be an independent ground for liability. The only covered claim
mentioned in the complaint was invasion of privacy, but as part of the
campaign of sexual harassment. As the court found, plaintiff did not face
a legitimate threat from Wood's invasion of privacy claim. Plaintiff
seizes on Wood's allegations that Middleton made inquiries of a personal
nature and would lean close to her at her work station. However, this is
not the type of "substantial intrusion" upon her private affairs which
would be "highly offensive to a reasonable person," such that the tort of
invasion of privacy has been committed. Hodgon v. Mt. Mansfield Co., 160
Vt. 150, 162, 624 A.2d 1122, 1129 (1992) (citing Restatement (Second) of
Torts § 652B (1977)); see also Denton v. Chittenden Bank, 163 Vt. 62, 69,
655 A.2d 703, 707-08 (1994) (supervisor's actions, including asking
personal questions of employee regarding illness and absence from work, at
home
in front of family and friends, and turning his desk to face employee's and
opening doors between their offices did not amount to intrusion that would
be highly offensive to reasonable person); Restatement (Second) of Torts §
652B cmt. d (1977) (no liability for a few demands for payment of debt;
only when "repeated with such persistence and frequency as to amount to a
course of hounding the plaintiff that becomes a substantial burden to his
existence" is privacy invaded). We cannot conclude that the possibility
that plaintiff committed the independent tort of invasion of privacy would
add any amount to a reasonable settlement.
Plaintiffs' other claims are even weaker, because plaintiff is
attempting to use the factual assertions in the Wood complaint to put
together tort claims Wood never asserted. Even if Wood could have
asserted these claims, she did not do so, and thus we do not believe they
can be valued as part of the settlement. Caterpillar, Inc. v. Great
American Ins. Co., 62 F.3d 955, 964 (7th Cir. 1995) (in addressing
allocation of settlement amount between covered and uncovered claims, court
may not consider theories of liability never at issue in the underlying
complaint); Piper Jaffray Cos. v. Nat'l Union Fire Ins. Co., 38 F. Supp. 2d 771, 776 (D. Minn. 1999) (same); see also Roman Mosaic & Tile Co. v. Aetna
Cas. & Surety Co., 704 A.2d 665, 669 (Pa. Super. Ct. 1997).
Plaintiff's third argument on appeal is that Wood's sexual harassment
claim was covered by its Workers' Compensation and Employers Liability
Policy. We reject this argument for the same basic reason that we reject
the second argument. Wood never pursued a claim for workers' compensation.
The fact that defendant's employee believed she might have a claim for such
benefits is irrelevant in absence of a claim by her. Workers'
compensation liability played no part in the $45,000 settlement.
Finally, plaintiff argues that the court prematurely dismissed its bad
faith claim against Lumbermens because the court used the standard
applicable to first-party, rather than third-party, bad faith claims.
Compare Bushey v. Allstate Ins. Co., 164 Vt. 399, 402, 670 A.2d 807, 809
(1995) (standard for first-party bad faith claims), with Myers v.
Ambassador Ins. Co., 146 Vt. 552, 556-57, 508 A.2d 689, 691 (1986)
(standards for third-party bad faith claims). The trial court dismissed
the bad faith claim because it had found no coverage for any of Wood's
claims.
We do not need to decide whether the court used the wrong standard
because the standard is not determinative. Plaintiff raises a plethora of
actions it asserts were taken in bad faith, but fails to show how any of
these actions damaged it. Third-party bad faith claims arise because of
the control an insurer has over the defense of underlying liability claims
and the conflict of interest that may develop between insured and insurer
over settlement. See Myers, 146 Vt. at 555, 508 A.2d at 691. In this
case, plaintiff ultimately controlled the defense and settled the
underlying action without Lumbermens' consent. There is no allegation
that the ultimate settlement amount was unreasonable because of actions of
Lumbermens, and we have held that there was no coverage on the claims
asserted in the Wood suit. To respond to a recurring theme in plaintiff's
arguments, we do not believe we could find bad faith in Lumbermens'
failure to inform Wood or plaintiff that there might have been coverage if
Wood asserted a workers' compensation claim. While Lumbermens must act
"honestly and according to its best judgment," Johnson v. Hardware Mut.
Cas. Co., 109 Vt. 481, 491, 1 A.2d 817, 820 (1938), it stretches the
carrier's duty beyond recognition to say it must disclose that different
claims in the underlying case might maximize coverage.
Affirmed.
BY THE COURT:
_______________________________________
Jeffrey L. Amestoy, Chief Justice
_______________________________________
John A. Dooley, Associate Justice
_______________________________________
James L. Morse, Associate Justice
_______________________________________
Denise R. Johnson, Associate Justice
_______________________________________
Marilyn S. Skoglund, Associate Justice
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Footnotes
FN1. Although this argument was not addressed by the trial court, it was
raised by plaintiff in its motion for summary judgment and on appeal.
Thus, we address it here.
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