SER Owners Insurance v. Hon. Warren R. McGraw, Judge

No. 13-1153 - State ex rel. Owners Insurance Company v. Honorable Warren R.
McGraw, Judge of the Circuit Court of Wyoming County, West
Virginia, and Morlan Enterprises, Inc.
FILED
June 18, 2014
released at 3:00 p.m.
RORY L. PERRY II, CLERK
SUPREME COURT OF APPEALS
OF WEST VIRGINIA
Davis, Chief Justice, concurring:
In this case, the petitioner, Owners Insurance, filed a petition for a writ of
prohibition seeking to challenge four rulings by the circuit court. The majority opinion has
determined that the issues were not proper for resolution through an extraordinary writ. I
concur in this determination. I have chosen to write separately to address issues raised in the
concurring and dissenting opinion of my good friend and colleague, Justice Ketchum.
At the outset, let me be perfectly clear in pointing out that the doctrine of
equitable contribution has no application to Morlan’s claim in this case. The dissent simply
is legally wrong in arguing that Morlan does not have standing to recover its attorney’s fees.
As I will demonstrate below, the dissenting opinion has completely ignored the large body
of law that actually governs Morlan’s claim for attorney’s fees.
To begin, the action against Owners was filed as a first-party bad faith action
by Morlan. The damages sought by Morlan include the recovery of the attorney’s fees its
legal counsel charged in the underlying action. Owners is attempting to minimize its
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damages by offsetting the attorney’s fees, because Westfield Insurance actually paid the fees
on behalf of Morlan. As a general matter, we have held the following regarding the recovery
of attorney’s fees in a bad faith action:
Where an insured is required to retain counsel to defend
himself in litigation because his insurer has refused without
valid justification to defend him, in violation of its insurance
policy, the insured is entitled to recover from the insurer the
expenses of litigation, including costs and reasonable attorney’s
fees.
Syl. pt. 1, Aetna Cas. & Sur. Co. v. Pitrolo, 176 W. Va. 190, 342 S.E.2d 156 (1986). The
intent of Aetna is to allow an insured plaintiff to recover the costs of litigation when an
insurer wrongfully refuses to provide coverage.
Owners’ attempt to offset the attorney’s fees paid on Morlan’s behalf in the
underlying litigation is precluded by the collateral source rule. This Court has described the
collateral source rule as follows:
The collateral source rule was established to prevent the
defendant from taking advantage of payments received by the
plaintiff as a result of his own contractual arrangements entirely
independent of the defendant. Part of the rationale for this rule
is that the party at fault should not be able to minimize his
damages by offsetting payments received by the injured party
through his own independent arrangements.
Ratlief v. Yokum, 167 W. Va. 779, 787, 280 S.E.2d 584, 590 (1981). We have held that
“[t]he purpose of the collateral source doctrine is to prevent reduction in the damage liability
of defendants simply because the victim had the good fortune to be insured or have other
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means of compensation.” Ilosky v. Michelin Tire Corp., 172 W. Va. 435, 447, 307 S.E.2d
603, 615 (1983). In tort actions similar to the instant case, courts have applied the collateral
source rule to prevent a defendant from offsetting attorney’s fees paid on behalf of a plaintiff
by an insurance company.
For example, in Graco, Inc. v. CRC, Inc. of Texas, 47 S.W.3d 742 (Tex. App.
2001), a plaintiff was injured by a hydraulic ram machine. The plaintiff filed a products
liability action against the machine manufacturer, Graco, Inc., and the seller of the machine,
CRC, Inc. Thereafter, CRC filed a cross-claim for indemnity against Graco. After the
plaintiff’s underlying claim was settled, CRC’s insurer, State Farm, intervened in the
cross-claim. State Farm sought to recover $107,859.82 that it incurred in attorney’s fees and
expenses on behalf of CRC in the underlying action. Graco moved to strike State Farm’s
intervention. The trial court's final judgment awarded CRC $107,859.82 for attorney’s fees
and expenses incurred in the underlying action, and granted Graco’s motion to strike State
Farm’s intervention. On appeal, Graco argued that CRC was not entitled to recover
attorney’s fees. The issue was framed as follows:
Graco argues that because State Farm rather than CRC
retained [the attorney], CRC incurred no obligation to pay [the
attorney] and, thus, CRC incurred no compensable losses. CRC
asserts the collateral source rule allows it to recover fees
incurred by State Farm on CRC’s behalf.
Graco, 47 S.W.3d at 745. The appellate court agreed with CRC that the collateral source
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rule allowed it to recover the attorney’s fees that State Farm had paid. The opinion addressed
the matter thusly:
The collateral source rule bars a wrongdoer from
offsetting his liability by insurance benefits independently
procured by the injured party. . . . Under the collateral source
rule, Graco would not be relieved of its duty to pay CRC’s
attorney’s fees merely because CRC’s defense was provided by
State Farm. Graco argues the collateral source rule does not
apply because the issue does not concern who paid [the
attorney’s] fees, but rather who incurred the fees. . . .
....
We conclude that the collateral source rule applies to this
case and, therefore, CRC incurred the legal fees and expenses
that were provided by CRC’s insurance company. When CRC
purchased insurance from State Farm, CRC paid State Farm to
provide legal representation for CRC in such litigation.
Chapman, although retained and paid by State Farm, provided
services to State Farm’s insured, CRC, valued at
$107,859.82. . . . Because the collateral source rule applies, we
conclude the evidence supports the trial court’s finding CRC
incurred $107,859.82 in legal fees and expenses in this cause.
Graco, 47 S.W.3d at 744-46 (internal citations omitted). Additionally, even though Graco
successfully had State Farm dismissed from the case, Graco also argued on appeal that
“because State Farm actually incurred the legal expense in this action, State Farm is the real
party in interest.” Graco, 47 S.W.3d at 746. The appellate court rejected the argument as
follows:
Graco contends State Farm should be allowed recovery
only upon proving Graco’s liability in the underlying product
liability case. . . .
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Graco’s argument is without merit. . . . [T]he trial court
awarded judgment to CRC, not to State Farm. State Farm’s
intervention was dismissed with prejudice. . . .
Moreover, we disagree with Graco’s premise that the
claim for attorney’s fees necessarily belongs to State Farm. A
claim for attorney’s fees belongs to the litigant, not to his
attorney. . . . We likewise conclude, in this case, that the claim
for attorney’s fees belongs to CRC rather than to State Farm.
Graco, 47 S.W.3d at 746-47 (internal citations omitted).
The court in Fust v. Francois, 913 S.W.2d 38 (Mo. Ct. App. 1995), also
addressed the issue of the application of the collateral source doctrine to attorney’s fees paid
by an insurer in an underlying action. In Fust, the plaintiffs brought an action for malicious
prosecution against the defendants as a result of an earlier unsuccessful lawsuit that the
defendants had brought against them. The plaintiffs’ legal fees in the underlying action were
paid by an insurer. Even so, the plaintiffs obtained a judgment against the defendants that
included recovery of attorney’s fees incurred in the previous action. On appeal, the
defendants argued that the trial court committed error in granting the plaintiffs’ motion in
limine to exclude any testimony showing that the plaintiffs did not pay any attorney’s fees
in defending the underlying action. The defendants contended that insofar as the plaintiffs’
insurer paid the attorney’s fees, the plaintiffs should not have been allowed to recover the
same. The appellate court disagreed:
[W]e find the court did not abuse its discretion in ruling the
evidence inadmissible. The use of the collateral source rule was
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recently articulated by the Missouri Supreme Court in the case
Washington v. Barnes Hosp., 897 S.W.2d 611 (Mo. banc 1995).
In Washington, the . . . court thoroughly reviewed the case law
applying the collateral source rule and the underlying reasons
for its application. One reason identified by the court and which
applies to the present case is the “benefit of the bargain”
rationale, i.e. the plaintiff who contracts for insurance with his
or her own funds should receive that benefit without it being
disclosed. . . . The common rationale for the rule is that a
wrongdoer is not entitled to have the damages to which he is
liable reduced by proving that plaintiff has received or will
receive compensation or indemnity for the loss from a collateral
source, wholly independent of him, or, stated more succinctly,
the wrongdoer may not be benefited by collateral payments
made to the person he has wronged. . . .
[The defendants] argue[] the evidence was not meant to
get an offset or credit against damages but to rebut the
[plaintiffs’] claim of the existence of damages—the fact of
damages. It is well-settled that damages need not be proved
with exact certainty, but rather it is the fact of damages, not the
amount of damages, that must be proven with reasonable
certainty. . . .
In the malicious prosecution context, there was testimony
concerning the services of the law firm and the amount of those
services. Such testimony is sufficient evidence of damages.
Whether the [plaintiffs] were the ones who in fact paid the law
firm directly for the services is irrelevant.
Fust, 913 S.W.2d at 47 (internal quotations and citations omitted). See also Worsham v.
Greenfield, 78 A.3d 358, 371 (Md. 2013) (“[W]e hold that a party compelled to defend him
or herself . . . may recover the costs associated with that litigation . . ., regardless of whether
those costs were paid by that party or by an insurance company or by another third person on
the party’s behalf.”); Otis Elevator, Inc. v. Hardin Constt. Co. Grp., Inc., 450 S.E.2d 41, 46
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(S.C. 1994) (applying collateral source rule to prevent defendant from “receiv[ing] the
benefit of an insurance contract for which [plaintiff] paid the premiums”).
In the bankruptcy proceeding of In re EBW Laser, Inc., Nos. 05-10220C-7G
& 05-10221C-7G, 2012 WL 3490417 (Bkrtcy. M.D.N.C. Aug. 14, 2012), the Trustee of the
estate of two debtors sought damages from three respondents who had wrongfully sued the
Trustee while the bankruptcy proceeding was pending. The Trustee was seeking to recover
the attorney’s fees he had incurred in the respondents’ underlying wrongful lawsuit. The
respondents argued that the Trustee was not entitled to recover the attorney’s fees because
the fees were paid by an insurer. The bankruptcy court rejected the argument as follows:
The Respondents urge that the assessment of damages
covering the fees . . . is unnecessary because the fees were paid
by the malpractice insurance carrier for the Trustee and his law
firm. This objection requires consideration of the collateral
source rule. Under the collateral source rule, a plaintiff’s
recovery will not be diminished by benefits received from a
source independent of the wrongdoer. . . . . The policy
underlying the rule focuses on the inherent unfairness of
improving the defendant’s position through consideration of
payments made independently to the plaintiff. . . . At least one
bankruptcy court has determined that the collateral source rule
applies to preclude diminishment of sanctions damages
including attorney fees. In re Briggs, 143 B.R. 438, 463-64
(Bankr. E.D.Mich. 1992). In Briggs, the creditor sought a
reduction in the attorney fees assessed as sanctions based on the
debtor having obtained legal representation pursuant to a legal
services plan. . . . . The debtor had purchased the plan in
advance of the bankruptcy as an employee benefit. . . . Invoking
the collateral source rule, the court found that the sanctioned
party should not benefit from the debtor having available
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insurance obtained by the debtor through his employer. . . .
These same considerations are applicable in this case. The
Trustee and his law firm paid the price required to purchase
malpractice insurance which was completely independent of the
Respondents. The payments cited by the Respondents are the
proceeds from a collateral source. Pursuant to the collateral
source rule, the Respondents should not be relieved of
responsibility for their wrongful conduct as a result of the
payments which were in no way contributed to by the
Respondents.
In re EBW, 2012 WL 3490417, at *19 (internal citations omitted). See also Broaddus v.
Shields, No. 08C4420, 2010 WL 4684033, *2 (N.D. Ill. 2010) (“[U]nder the collateral source
rule, the fact that Griffin Capital’s insurer may have paid certain attorney’s fees does not
absolve Broaddus from paying any such fees”[.]).
The cases cited above did not involve a breach of a contract on the part of the
defendants to provide legal counsel for the plaintiffs in the underlying actions. This point
is critical because a majority of courts do not apply the collateral source rule to a breach of
contract claim in which a plaintiff seeks recovery of attorney’s fees paid by another insurer.
These courts have held that “[t]he collateral source rule, if applied to an action based on
breach of contract, would violate the contractual damage rule that no one shall profit more
from the breach of an obligation than from its full performance.” Pan Pacific Retail Props.,
Inc. v. Gulf Ins. Co., 471 F.3d 961, 973 (9th Cir. 2006) (internal quotations and citation
omitted). See also Bramalea California, Inc. v. Reliable Interiors, Inc., 119 Cal. App. 4th
468, 472 (Cal. Ct. App. 2004) (“[T]he collateral source rule applies to tort damages, not to
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damages for breach of contract.”).
However, at least one court does, in fact, “apply the collateral source rule to
causes of action in contract, as well as to actions in tort.” Citizens Prop. Ins. Corp. v.
Hamilton, 43 So. 3d 746, 751 (Fla. Dist. Ct. App. 2010). For example, in Bangert v. Beeler,
470 So. 2d 817 (Fla. Dist. Ct. App. 1985), the plaintiffs brought an action against two
defendants after the defendants refused to provide them with legal representation in an
underlying action.1 The trial court found that the plaintiffs could not recover the attorney
fees paid in the underlying action because their insurer had paid for the same. The plaintiffs
appealed and argued that they should be allowed to recover the attorney’s fees paid by their
insurer. The appellate court agreed:
In Walker v. Hilliard, 329 So. 2d 44 (Fla. 1st DCA 1976),
we held that the collateral source rule applies not only in tort,
but also in contract. Thus, a tractor seller who breached the
warranty of title was liable for the full amount of damages even
though the buyer’s insuror paid the buyer for some of the
damages. Here, the party that breached the warranty to defend
title is likewise liable for the full amount of damages. The
breaching party should not be rewarded when the wronged
party’s collateral source is wholly independent of the breaching
party.
At the oral argument on this case, counsel for
[defendants] contended the collateral source rule should not
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The underlying action involved property the plaintiffs had purchased from the
defendants. The defendants were contractually obligated to defend title to the property by
providing legal counsel for the plaintiffs.
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apply because there is no evidence that the [plaintiffs] bought
the title insurance policy, and that it was probably purchased by
[someone else]. We have examined the record and find Mr.
Bangert [plaintiff] testified, without contradiction, that he
procured and paid for the policy.
Bangert, 470 So. 2d at 818 (emphasis added).
In sum, the case law around the country is clear in holding that, in a tort action
arising from an underlying action, a plaintiff may recover attorney’s fees paid on his or her
behalf by an insurance company in the underlying action. Although a majority of courts
preclude such recovery on a breach of contract claim, at least one jurisdiction permits such
a recovery.
In the instant proceeding, the record indicates that Morlan’s claims are based,
in part, upon statutory and common law bad faith causes of action. Our cases have made
clear that statutory and common law bad faith claims are tort actions. See Cava v. National
Union Fire Ins. Co. of Pittsburgh, Pa., 232 W. Va. 503, ___, 753 S.E.2d 1, 3 (2013) (“The
petitioners’ . . . complaint . . . set [sic] forth two tort causes of action: (1) common law ‘bad
faith’ and (2) violations of the West Virginia Unfair Trade Practices Act.”); Noland v.
Virginia Ins. Reciprocal, 224 W. Va. 372, 383, 686 S.E.2d 23, 34 (2009) (“The prior
decisions of this Court have clearly indicated that a common law bad faith claim sounds in
tort.”); Wilt v. State Auto. Mut. Ins. Co., 203 W. Va. 165, 167, 506 S.E.2d 608, 610 (1998)
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(“[T]his Court has previously determined that unfair settlement claims are tortious in
nature”); Syl. pt. 4, Poling v. Motorists Mut. Ins. Co., 192 W. Va. 46, 450 S.E.2d 635 (1994)
(“Violation of W. Va. Code, 33-11-4(9) [1985] is tortious conduct that may give rise to a
cause of action by a spouse for loss of consortium.”). Insofar as Morlan’s bad faith claims
are tort causes of action, under the majority rule in the country the collateral source rule
should be applied to allow Morlan to recover the attorney’s fees Westfield paid on its behalf
in the underlying case. Failure to appreciate the applicability of the collateral source rule to
the facts of this case demonstrates a patent lack of understanding of this most basic equitable
concept.
In the final analysis, the dissent is absolutely wrong in arguing that Morlan
cannot recover the attorney’s fees paid by Westfield.
For the foregoing reasons, I concur.
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