Southgate State Bank & Trust Co. v. United Pacific Insurance ( 1979 )

Parks, J.:

Plaintiff, Southgate State Bank and Trust Company, is insured under two liability insurance bonds. Primary coverage by Kansas Bankers Surety Company insures plaintiff up to $25,000, while defendant, United Pacific Insurance Company, insures plaintiff against liability in excess of $25,000 but less than $1,675,000. Except for the deductibles and limits of coverage, the language of relevant portions of both bonds is identical. Reasonable legal expenses may be incurred in defense actions under the provisions of both policies.

The present controversy arose when a $407,000 third-party complaint was filed against the bank. Both insurers were notified of the suit. The primary insurer agreed to defend the plaintiff but the defendant excess insurer refused. Apparently fearing an excessive judgment, the plaintiff bank retained private counsel to assist the primary insurer in its defense of the suit. The claim against the bank was settled for $12,500; subsequently the bank initiated this action seeking to recover attorney fees expended both in defending the third-party complaint and in bringing the recovery action itself. Although the Johnson County district court entered summary judgment for the plaintiff bank, it denied plaintiff’s prayer for costs and fees in the recovery action. Defendant appeals and plaintiff cross-appeals.

One purpose of liability insurance is to provide the insured with an adequate defense against claims under the policy and to protect the insured from the expenses and costs of such litigation. The duty of an insurance company to defend an insured pursuant to its policy contract requires the utmost good faith on the company’s part. Rules governing the duty to defend vary according to the language of the policies and according to whether the company is the sole, primary, or the secondary insurer.

Whether the carrier be the sole or the primary insurer, the duty to defend rests primarily on the possibility that coverage exists. This possibility may be remote, but if it exists the company owes the insured a defense. The possibility of coverage must be determined by a good-faith analysis of all information known to the insured or all information reasonably ascertainable by inquiry and investigation. Spruill Motors, Inc. v. Universal Underwriters Ins. Co., 212 Kan. 681, 686, 512 P.2d 403 (1973). However, where two insurance companies have issued general liability insurance policies to the same insured and each is obligated to defend, if one company affords a defense, the insured is not damaged because of the failure of the other to defend. Farmers Elevator Mut. Ins. Co. v. American Mut. Lia. Ins. Co., 185 Neb. 4, Syl. ¶ 8, 173 N.W.2d 378 (1969).

The present case does not involve a situation in which a single insurance carrier, obligated to defend an action on a claim covered by its policy, did not act in good faith in refusing to defend an action against its insured. We find to the contrary that plaintiff was not left without a defense or coverage, but was adequately defended by Kansas Bankers under its obligation to do so. As regards Kansas Bankers, its liability was fixed with respect to its obligation to plaintiff. In respect to defendant, plaintiff bank could only look to defendant for any liability in excess of the policy limits of Kansas Bankers’ policy. Hence the bank proceeded on its own rather than under the provisions of the secondary bond when it elected to independently retain additional counsel. Since plaintiff was adequately protected under the Kansas Bankers’ policy, the refusal by defendant to defend plaintiff did not enhance plaintiff’s liability or exposure to liability. Donahue Construction Co. v. Transport Indemnity Co., 86 Cal. Rptr. 632, 7 Cal. App. 3d 291 (1970).

Accordingly, we hold that it was error for the trial court to grant plaintiff’s motion for summary judgment, and to award plaintiff attorney fees incurred in defending the third-party complaint. We further hold that the trial court was correct in denying plaintiff attorney fees in the present action.

Judgment is reversed insofar as the appeal and affirmed insofar as the cross-appeal.