Ins. Co. of N. Am. v. Travelers Ins. Co. , 118 Ohio App. 3d 302 ( 1997 )

Although I agree with that part of the majority's opinion in which it finds that INA's coverage did not extend to the Brewer claim, I must dissent from its conclusion that the trial court erred by finding that Travelers should bear the cost of the Brewer settlement. Respectfully, I believe that the majority's emphasis on INA's failure to reserve its rights comes at the expense of addressing the lack of any actual prejudice suffered by Travelers.

The majority candidly concedes that "INA's coverage did not extend to the Brewer claim." Despite making this point, the majority finds that INA was either the primary insurer (despite having concluded that INA did not have coverage) or was the secondary insurer but waived its right to seek contribution through the "other insurance" clause of the INA policy.

This finding results from the majority's incomplete quotation of the INA policy. Section 8, the "other insurance" provision of the INA policy, reads as follows:

"The insurance afforded by this Coverage Part is primary insurance and we will not seek contribution from any other insurance available to you unless the other insurance is provided by a `contractor' other than the designated `contractor' for the same operation and job location designated in the Declarations. Then we will share with that other insurance by the method described below. * * *" (Emphasis added.)

Since Brewer suffered his injury on property controlled by Morse, the majority must necessarily find that INA had no coverage. Despite this finding, it states that INA has primary coverage. The logical inconsistency with the majority's position is that it imposes liability for coverage where it has said that none exists.

Moreover, by selectively quoting Section 8 of the INA policy, the majority creates the false impression that INA agreed to primary coverage. Read in its entirety, Section 8 provides primary coverage unless the other insurance is provided by another contractor for the same operation and job location. The "other contractor" in Section 8 would be Morse and the "other insurance" would be the Travelers policy. Ironically, the Travelers policy contains a virtually identical "other insurance" provision that states that the Travelers policy is primary coverage. Since Brewer's accident indisputably occurred on property controlled by Morse, the majority errs by finding INA primarily liable.

I have no quarrel in principle with the majority's discussion relating to an insurer's need to reserve its rights, but I find the significance of the reservation-of-rights issue considerably diminished under the unusual facts of this case because the majority fails to address the actual prejudice suffered by Travelers as a result of the Brewer settlement. When actual prejudice is considered, I believe the trial court did not abuse its discretion by concluding that the equities favor INA.

The majority creates a broad, per se rule that finds actual prejudice resulting from a failure to reserve rights. As authority for this new rule, the majority cites our decision inSocony-Vacuum Oil Co. v. Continental Cas. Co. (1944), 45 Ohio Law. Abs. 458, 67 N.E.2d 836, affirmed on other grounds (1945),144 Ohio St. 382, 29 Ohio Op. 563, 59 N.E.2d 199, for the proposition that when an insurer takes over the defense of a matter without reserving its rights, the insured gives up the valuable right to conduct a defense, and the passage of a considerable amount of time between assuming the defense and disclaiming the defense will lead to the conclusive presumption that the insured has been prejudiced. 45 Ohio Law.Abs. at 464,67 N.E.2d at 839.

Socony-Vacuum lacks precedential value for three reasons. First, any statement by this court regarding a conclusive presumption of prejudice in that case was obvious dicta. The court prefaced that part of the opinion with the qualification "[b]ut even if it could be contended in the instant case the prejudice to the insured is a necessary part of its case against Continental, the facts are sufficient to fulfill such requirement." Id. Clearly, any statement regarding prejudice was not necessary to the holding and therefore constituted dicta. Second, even Travelers concedes that the Ohio Supreme Court affirmed Socony-Vacuum, but did so on breach of contract grounds, not on principles of equitable estoppel. As the majority notes, the Supreme Court's statements relating to estoppel were also dictum, so they lack any precedential value. Third, even were this court's statements relating to per se prejudice not dicta, those statements were, in any event, necessarily limited by the Supreme Court's ruling on other grounds.

Subsequent authority also rejects the majority's per se rule finding prejudice from a failure to reserve rights. AmerisureIns. Co. v. Mut. Fire, Marine Inland Ins. Co. (May 9, 1991), Cuyahoga App. No. 58433, unreported, 1991 WL 76034, cited by the majority, actually contradicts its rule of per se prejudice because it requires the court to find actual prejudice. The portion quoted by the majority states:

"Ordinarily, an insurer is estopped to deny its duty to defend only when (a) it undertakes the defense without advising the insured about its disclaimer of coverage, and (b) itswithdrawal causes significant prejudice to the insured whoreasonably relied on the insurer's apparent willingness todefend." (Emphasis added.) Id. at 6.

Likewise, the cited portions of Turner Liquidating Co. v. St.Paul Surplus Lines Ins. Co. (1994), 93 Ohio App. 3d 292, 299,638 N.E.2d 174, 179, show an exception to the rule that estoppel can be used when the insurer assumes a defense without reserving its rights "for such a period of time as to prejudice the insured." (Emphasis added.)

The factors a court should consider when determining actual prejudice from a failure to reserve rights are well stated in 7C Appleman, Insurance Law and Practice (1979) 313-319, Section 4693:

"Factors that may result in prejudice include the loss of a favorable settlement opportunity, inability to produce all testimony existing in support of a case, inability to produce favorable witnesses, loss of benefit of any defense in law or fact through reliance upon the insurer's promise to defend, or withdrawal so near the time of trial that the insured is hampered in the preparation of its defense." (Footnote omitted.)

Although INA could have made a more diligent inquiry before tendering defense of the Brewer suit to Travelers, that delay, standing alone, is insufficient under the facts of this case to show actual prejudice to Travelers.

The record does not show (nor does Travelers argue) that INA's delay in tendering the suit prevented it from preparing a defense of the Brewer case. In point of fact, the uncontradicted evidence shows that Travelers conducted a very thorough investigation of the Brewer claim nearly two years before Brewer filed suit. Immediately following Brewer's injury, a Travelers claims adjuster photographed the accident site, took a recorded statement, obtained meteorological data, and consulted OSHA regulations. The adjuster's report to Travelers concluded that "insured [Morse] is 80-85% negligent because insured should have created a nonslip/skid ramp — all the way down instead of only partially."

The lack of actual prejudice to Travelers is further shown by its inability to argue that INA settled with Brewer for an unreasonably high amount. Travelers does not make this argument, most likely because the evidence conclusively demonstrates the opposite. INA's settlement committee figured $127,000 would be a "walkaway" figure for settlement, and created a reserve of $133,000. Pretrial discovery indicated that the employee suffered about $40,000 in special damages. Under the circumstances, INA's $100,000 settlement appears very favorable.

INA invited Travelers to join with it to arrive at a reasonable settlement figure, but Travelers flatly refused to agree to "any reasonable settlement" because it was not "privy to the facts, damages or prior negotiations involved." Oddly, Travelers then told INA, "[I]t is in your company's best interest to settle this matter. Your failure to settle, for a reasonable figure, may put you in a position of acting in `bad faith' with the defendants you are presently defending."

Finally, I would recognize that the reservation-of-rights issue presented here is distinguishable from the typical case involving an unsophisticated policyholder. As an insurance company, Travelers presumably has the same level of sophistication as INA and does not need the type of protection the reservation-of-rights decision affords to less sophisticated policyholders.

It is important to distinguish the situation presented in this appeal from those cases where the courts seek to protect a policyholder. In those circumstances, some courts have criticized judicial attempts to discern the relative sophistication of parties to insurance contracts. See, e.g.,United States Fid. Guar. Co. v. Kammeyer (1994), 97 Ohio App. 3d 101,107, 646 N.E.2d 244, 248. I do not disagree with those criticisms in the abstract, but would suggest that insurance law has developed in large measure based upon the recognition that an insured lacks an equal bargaining position with the insurance company. In this case, the trial court made the specific finding that Travelers can bring its own resources to bear on a policy dispute and simply does not need the same kind of protection the law affords other less sophisticated parties. While I would not urge the courts to make this a consideration in every such case, ignoring Travelers' relatively equal bargaining position would omit consideration of a very relevant factor tending to show Travelers did not suffer any prejudice from INA's late refusal to defend.

The only prejudice Travelers can show on this record is that the trial court ordered it to pay an amount that everyone agrees Travelers would have to pay had INA reserved its rights in the first place. Instead of applying the intractable rule set forth by the majority, the trial judge gave due consideration to all relevant equitable factors when concluding that Travelers failed to suffer actual prejudice as a result of INA's late tender.

Importantly, the trial judge found, as a matter of equity, that Travelers should not be permitted to escape paying a settlement amount that it would have to pay had INA reserved its rights when it undertook defense of the Brewer suit. The majority's rigid application of the equitable maxim that equity will not aid a volunteer miscomprehends not only that equitable maxim, but the nature of equity itself.

Equity labels a person a volunteer if he undertakes a duty gratuitously, not from the necessity or in the discharge of a binding obligation. As the majority notes, INA was in a bad-faith predicament, having the obligation to assume the defense of the Brewer suit. It therefore fails to meet the classic definition of a volunteer.

Moreover, equitable maxims are not to be applied as rigid rules or defining principles — their value lies in flexible application as equity may so require. It is for that reason that equitable maxims cover the legal spectrum. In this case, the trial judge applied an adjunct of the equitable maxim that that "no application of an equitable rule will be made, that will operate inequitably." Tone v. Columbus (1883), 39 Ohio St. 281,306. I would find that the trial judge did not abuse his discretion when exercising his equitable discretion under the circumstances and affirm.