Roberts v. United States Fid. & Guar. Co. - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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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 St.3d
___.]
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.

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.

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 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.

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.
2

The complaint also alleged that Wikel's own attorneys had committed
malpractice in defending the suit. The following pertinent evidence was
adduced at trial.

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
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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 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 ***."

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
4

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.

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.

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.

Spengler Nathanson, James R. Jeffery, Teresa L. Grigsby and James D.
Jensen, for appellee and cross-appellant.
5

__________

FRANCIS E. SWEENEY, SR., J. 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.

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
6

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. This case has been litigated for over
ten years and should come to final resolution before this court.1

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
7

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.

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
8

determination was ever made that Wikel's separate counsel 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.

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
9

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.

MOYER, C.J., DOUGLAS and GRADY, JJ., concur.

PFEIFER, J., concurring in part and dissenting in part. 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.
10

THOMAS J. GRADY, J., of the Second Appellate District, sitting for
RESNICK, J.

Footnotes
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.
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.

COOK, J., dissenting. 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.

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
11

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.

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. 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.
12

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.

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.

13