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Socony-Vacuum Oil Co. v. Cas. Co.

Supreme Court of Ohio
Jan 24, 1945
144 Ohio St. 382 (Ohio 1945)

Summary

finding that where the pleadings unmistakably bring action within the coverage of the policy, the duty to defend will attach

Summary of this case from Elevators Mutual Ins. Co. v. Scassa

Opinion

No. 29951

Decided January 24, 1945.

Liability insurance — Duty of insurer to defend insured determined from plaintiff's petition — Insurer to make defense regardless of its ultimate liability, when — Insurer not required to defend groundless claim, when — Contract breached by insurer making claim of nonliability for indemnification, when — Insured may employ counsel to participate in defense — Insurer liable for attorney fees and expenses, when.

1. The duty of a liability insurance company under its policy to defend an action against its insured is determined, from the plaintiff's petition, and when that pleading brings the action within the coverage of the policy of insurance, the insurer is required to make defense regardless of its ultimate liability to the insured.

2. The fact that the policy contains a provision that the insurer shall make defense even though the claim may be groundless, does not require the insurer to defend a groundless claim which is not within the coverage of the policy.

3. A liability insurance company breaches its contract to defend by making to the insured such a claim of nonliability for indemnification as to render it impossible for such company, in making defense, to protect both its own interests and those of the insured.

4. When there is such a breach of contract, accompanied by an invitation to insured to employ its own counsel to participate in the defense for its own protection, the insured, protesting against such action, may employ counsel with notice to the insurance company that it must bear the expense, and the company will be liable for reasonable attorney fees and proper expenses incurred in making defense.

APPEAL from the Court of Appeals of Cuyahoga county.

This action was brought on December 11, 1942, in the Municipal Court of Cleveland by Socony-Vacuum Oil Company against Continental Casualty Company to recover the amount paid for attorneys fees and other expenses, in defense of an action brought by one Robert Harper for damages for personal injury sustained by him during the period that a contingent liability policy executed and delivered by the casualty company was in force.

The controlling facts are not in controversy.

On October 8, 1937, Socony-Vacuum Oil Company, a New York corporation, entered into a contract with Paugh Brown, Inc., an Ohio corporation, as an independent contractor, for the construction of an addition to a warehouse owned by the former and located at 2846 East 37th street, Cleveland, Ohio.

On October 14, 1937, Continental Casualty Company, an Indiana corporation, hereinafter called insurer, issued to Socony-Vacuum Oil Company, hereinafter called insured, the insurance policy, hereinbefore referred to, covering the construction of such addition. The policy continued in force for one year from the date of issuance, and contained, inter alia, these pertinent provisions:

"A. To insure the herein named assured against loss from the liability imposed by law upon the assured for damages on account of bodily injuries, including death resulting therefrom, accidentally suffered, or alleged to have been suffered, within the policy period by any person or persons not employed by the assured by reason of (1) the negligence of any independent contractor or independent subcontractor of the assured while actually engaged in the work described in the schedule at the place stated in the schedule: (2) materials or appliances, intended for such contractors' or subcontractors' operations, while upon the premises described in the schedule or lawfully maintained upon the ways immediately adjacent thereto.

"B. To investigate all reported accidents covered hereby; to defend for the assured any suits, even if groundless, brought against the assured to recover damages for which indemnity is payable under this policy unless the company shall elect to effect settlement thereof; to pay, irrespective of the limits of liability hereinafter mentioned, all expense incurred by the company for investigation or defense, including all costs taxed against the assured in such suits and all interest accruing after entry of judgment, also expense necessarily paid in money by assured at time of accident in removing injured person to a suitable place and such expense so paid for such immediate surgical aid as may then be imperative. * * *

"Exceptions: 2. This policy does not cover * * * any loss on account of injuries or death suffered by any person or persons caused by (a) any employee of assured; (b) faulty work as distinguished from acts of negligence in the actual doing of the work. * * *

"Statement 15. The liability of the company for loss from an accident resulting in bodily injuries to or in the death of one person only is limited to twenty-five thousand dollars ($25,000) * * *."

On February 21, 1938, while such policy was in force, Robert Harper, an employee of the Sharpsville Boiler Tank Company, an independent subcontractor under the contract between Paugh Brown, Inc., and the insured, was injured while working on the construction of the warehouse.

On August 3, 1938, Robert Harper filed suit against the insured to recover damages in the sum of $25,000 for the injury so sustained. His second amended petition, in which Paugh Brown, Inc., was joined as a new defendant, contains the following material allegations:

"On or about the 21st day of February, 1938, about 10:30 o'clock in the morning, plaintiff as an employee of the Sharpsville Boiler Tank Company, was working upon the premises of the defendant Socony-Vacuum Oil Company situated at 2846 East 37th street in the city of Cleveland, and in the course of his said employment was in a certain steel tank wherein a large heavy steel plate was being inserted under the immediate direction and supervision of defendants Socony-Vacuum Oil Company and Paugh Brown, Inc., when suddenly, solely by reason of the negligence and recklessness of the defendants, as hereinafter set forth, and without fault or negligence on plaintiff's part, defendants peremptorily commanded and ordered certain workmen who were then and there holding up or supporting said steel plate which was in an erect or upright position in said tank, to perform another task, and as a direct and proximate consequence whereof, the support which was holding said plate in position and upright was substantially withdrawn and said plate forcibly buckled and toppled over upon the plaintiff, crushing his left ankle, and otherwise seriously injuring him as hereinafter described.

"At the time and place complained of the defendants were negligent and reckless in the following regards, to wit:

"They negligently and recklessly peremptorily ordered and commanded the workmen who were supporting said plate in upright position, to abandon their task in favor of another, thereby causing and permitting said plate to buckle and topple; negligently and recklessly ordered, conducted and directed the erection, welding and affixing of said plate in said tank in a dangerous, unsafe and unworkmanlike manner and so as to threaten the life and safety of the plaintiff;

"negligently and recklessly failed and neglected to warn or apprise the plaintiff of their intention to cause the support to be withdrawn from said upright sheet, or of the other dangers to which they were then and there subjecting him;

"negligently and recklessly, before causing said workmen to abandon their support of said upright plate, failed and neglected to cause the same to be firmly and securely fastened, moored and affixed by welding, or otherwise, to stable cross-beams or other supports in said tank, so as to prevent the same from falling or toppling upon the plaintiff;

"and negligently and recklessly failed and neglected to promulgate, enforce and follow safe and workmanlike rules and methods for the construction of said tank, and particularly the insertion of said metal plates therein."

The insurer took full charge of the defense and maintained control and direction thereof throughout. On August 9, 1939, more than a year after Harper's suit was filed, the insurer wrote a letter to the insured in which the following pertinent language was used:

"* * * In our opinion Northam [a building inspector of the city of Cleveland] was a direct employee of Socony-Vacuum at the time of the happening of the accident.

"We feel that we should further say in passing that we do not believe that he was guilty of negligence at the time of the accident, and, further, that if he were found to have been negligent at the time, his activities were beyond the scope of his authority and employment. This brings us to the point to which we especially desire to call your attention."

After reference to the part of the policy headed "Exceptions: 2," the letter continues:

"The only way in which it is possible for the plaintiff to recover against Socony-Vacuum would be because of its employee being negligent in the performing of his work. If there is a recovery, therefore, then under the quoted exception of the contract of insurance it would seem that Socony-Vacuum would have no protection under the terms of that contract.

"We feel that it is our duty to suggest the above to you so that you may carefully consider the entire proposition and determine the course which in your judgment is best for you to pursue. Undoubtedly, under the terms of the contract of insurance, we owe you the duty of defending you, but under the circumstances it may be that since there is a possibility of a failure of protection for the reasons hereinbefore set forth, you may desire to associate with us in your defense your personal counsel. If this is your conclusion, please be advised that we would be very glad to have your personal counsel associated with us in the defense of the present action, without prejudice to either party." (Italics ours.)

On August 22, 1939, attorneys for the insured replied by letter in which is the following pertinent language:

"While we do not accept the factual statements contained in your letter of the above date as being complete or entirely accurate, they do demonstrate that the implication of a possible breach of the terms of your policy * * * is without merit and unjustified. The assured will hold your company to full performance of the terms of the policy as written, including the defense of this case, payment of any judgment or judgments up to and including the policy limits, and the other provisions thereof.

"Furthermore, this case was filed on or about August 1, 1938, or more than a year ago. Your company assumed control of the proceedings after notice from Socony-Vacuum Oil Company, and in the interim has directed various pleadings to the petition. If any such question could be said to exist, as described in your letter of August 9, 1939, the same has been waived. Accordingly, you are advised that Socony-Vacuum Oil Company, Inc., will, if you make it necessary, take advantage of that and all other available defenses.

"The threatened breach contained in your letter above referred to makes it necessary for Socony-Vacuum Oil Company, Inc., to safeguard its interests. Your letter also states that this may be done without prejudice to either party. Accordingly, counsel for the assured will enter their appearance in this action, under the stipulation of non-prejudice suggested in your letter. It is assumed that your intention with respect to this stipulation of non-prejudice contemplates, includes and affects the provisions of clause 1 of the conditions, as well as the other provisions of the policy. Inasmuch as your acts compel the procedure outlined in this letter, it follows that your company will be expected to pay the expense."

On September 9, 1939, the attorneys for the insurer replied with a letter, the material part of which is as follows:

"After fully considering the suggestions therein contained we feel compelled to say to you that we neither accept nor reject any of the claims and contentions made by you therein.

"We do call your attention, however, to the fact that your appearance in this case as well as our continuance therein is under the stipulation of non-prejudice suggested in our former letter to which you refer. This stipulation applies to all the terms and conditions of the contract of insurance and other matters incidental to this proposition."

There was no further correspondence up to the time Harper's case was tried in the Court of Common Pleas.

The journal entries and judgment in Harper's case were not offered in evidence herein, and so are not attached to the bill of exceptions. However, the opinion of the trial judge in that case, rendered September 4, 1941, was offered in evidence herein and is before us. It appears from it that "Paugh Brown are out of this case [Harper's case] by reason of the fact that counsel have dismissed the petition as to them." It further appears therefrom that in doing the work it was necessary to install a tank and while installing the tank, seven workmen of the subcontractor, the Sharpsville Boiler Tank Company, were holding in place a plate or sheet of steel upon which welding was to be done; that four of them left to get instrumentalities to hold the sheet in position, while a buckle in it was being taken out; and that in their absence the "buckle reversed itself" (according to one witness at least); at any rate for want of support the plate fell on Harper and injured him.

It further appears from such opinion that there was evidence of inspection to the effect following:

The Building Department of the city of Cleveland required that a person building a tank should hire either a building inspector who was on the list of the building department or a person acceptable to it. In accordance with this requirement, one Northam, who was on the list, was engaged as inspector and placed on the payroll of the insured.

In that opinion, the trial judge, with respect to the allegation as to a peremptory order, used this language:

"The first allegation of negligence is that they negligently and peremptorily ordered and commanded the workmen who were supporting said plate in an upright position to abandon their task in favor of another, thereby causing and permitting said plate to buckle and topple. The testimony in this case is that Mr. Northam gave no orders whatsoever as to how many men were to leave, or what they were to do. The fact of the matter is that nobody gave orders, according to some witnesses, and according to other witnesses Mr. Hunt, the foreman of Sharpsville Boiler Company, gave the orders, but not a single witness has Mr. Northam giving any orders to anybody to abandon his task and do something else than what he was doing, so that allegation of negligence must fail."

The trial court as further appears from that opinion, was "forced to the conclusion first of all that Mr. Northam, the inspector, was not, within the meaning of this lawsuit, an employee of the Socony-Vacuum Company; that the Sharpsville Boiler Company was an independent contractor; that the plaintiff has failed to show any negligence to support the claims he made in the petition; and that the proximate cause of the injury to this man was not the giving of the order to take the buckle out of the plate before welding it."

Thereupon that court reached the conclusion that "the motion [for a directed verdict] should be granted."

The trial court having directed a verdict for the insured, the plaintiff, Harper, on September 26, 1941, filed notice of appeal. On September 30, 1941, one of the attorneys for the insured wrote the insurer as follows:

"In view of the opinion rendered by Judge Day in directing the verdict for Socony-Vacuum Oil Company, Inc., which opinion approves and confirms the position which we have taken with your company, namely, that the inspector Northam was not an employee of Socony-Vacuum Oil Company, Inc., contrary to the position taken by you in your letter of August 9, 1939, to that company, we suggest that it is now in order for your company to admit full responsibility and to save us the necessity of further advances for expenses."

On October 14, 1941, the insurer replied, declining to alter the attitude taken.

The petition in the instant case avers that the judgment of the Court of Common Pleas in Harper's case, in favor of the insured, was affirmed by the Court of Appeals on April 4, 1942. This allegation is not specifically denied in the answer. Upon this matter the record is otherwise silent. During trial of the instant case in the Municipal Court, it was stipulated that the sum of $2,341.82 for attorneys fees and expenses was actually expended and that the fees were reasonable and the expenses proper. Judgment was rendered in that court for the insurer.

On appeal to the Court of Appeals the judgment below was reversed and final judgment rendered in favor of the insured in the amount of $2,341.82.

This court allowed a motion to certify the record.

Messrs. Thompson, Hine Flory, Mr. Thomas E. Lipscomb and Mr. Frank E. Lewellen, for appellee.

Messrs. Orgill, Maschke, Wickham, Duffy Loux and Mr. H. Frank VanLill, for appellant.


The sole question presented by this appeal is whether the Court of Appeals committed prejudicial error in entering final judgment for the insured, for attorney fees and expenses incurred in the defense of a damage suit for personal injuries, which was brought by Robert Harper against insured and resulted unfavorably to him.

Counsel for insurer assumed sole charge of the defense in Harper's case and for about one year continued in control without making any disclaimer of liability or without giving notice of its desire to defend with reservations. Then the insurer wrote a letter to the insured, in which it was stated in effect that in insurer's opinion it was not liable under the policy terms to indemnify for damages recovered against the insured, and it was suggested in that letter that insured might desire to employ its own counsel to assist in the defense. The insurer's claim of nonliability was founded upon the theory that the only way in which the insured could be liable for damages to Harper, would be upon the ground that Northam (an inspector selected from a list of city inspectors furnished by the Building Department of the city of Cleveland and paid for his services by the insured) was the employee of insured, and that he, as such employee, was guilty of negligence which was a direct and proximate cause of Harper's injuries. If this theory is well founded then, as the insurer claims, there was no liability imposed upon the insurer to indemnify the insured for any damages recovered, for the reason that the policy exempted from coverage injuries caused by an employee. It is claimed by the insured that this delay and the attendant circumstances constituted a waiver and worked an estoppel against the insurer. Such a waiver or estoppel could operate only in proceedings to compel insurer to pay a judgment recovered in a damage suit, which insurer had defended without reservations or notice of claim of reservations. In our judgment there was no waiver or estoppel which would afford a basis for the recovery of attorney fees and expenses paid, but the liability of the insurer to the insured with respect thereto depends upon whether there is a breach of the insurer's contractual obligation to make defense.

The duty of an insurance company to defend an action brought against its insured is determined from the plaintiff's petition and, when that pleading on its face discloses a case within the coverage of the policy, the insurer is required to make defense regardless of its "ultimate liability" to the insured ( Bloom-Rosenblum-Kline Co. v. Union Indemnity Co., 121 Ohio St. 220, 167 N.E. 884). In our judgment that case is sound and in accord with authority. See 8 Appleman's Insurance Law and Practice, 3, 8, Sections 4682, 4683. It is axiomatic that a policy which contains a provision that the insurer shall make defense of an action brought to recover damages for which indemnity is payable even though such action may be groundless, does not require the insurer to defend a groundless action which is not within the coverage of the policy. Conversely, the fact that the claim of Harper was in reality groundless does not of itself relieve the insurer from making defense provided his second amended petition alleges facts which showed a claim within the coverage of the policy.

In their brief, counsel for insurer admit, in the following language, its duty to defend the Harper case:

"Continental could not refuse to defend this suit for several reasons. It was compelled to defend because until the final determination of that suit, it would not be known whether Northam was Socony's employee or not."

Counsel then cite Bloom-Rosenblum-Kline Co. v. Union Indemnity Co., supra, and continue:

"It [the insurer] was compelled to defend because, even if Northam had been conceded to be an employee of Socony's, the injury might not have been caused by his negligence, which was indeed the result that came about. Continental was compelled under its contract to defend the suit, even though it were groundless."

By this language counsel for the insurer concede in effect that, determined by the second amended petition, there was coverage which imposed upon the insurer the obligation to defend.

Did the insurer commit a breach of its contract to defend? To answer this question requires a preliminary analysis of the pertinent provisions of the policy and the allegations of the second amended petition.

The policy covered bodily injuries accidentally suffered or alleged to have been suffered by any person not employed by the insured, (1) by reason of the negligence of any independent contractor or independent subcontractor or (2) by reason of materials or appliances intended for such contractors' or subcontractors' operations, while upon the premises in question.

Under such provisions of the policy there would be coverage in two classes of cases: (1) Actions brought against the insured for injuries caused by negligence of such a contractor or subcontractor, as for instance those suffered where the work was inherently dangerous. In such cases the gist of the action against the insured would not be its own negligence, but the negligence of the independent contractor or subcontractor. (2) Actions brought against the insured for injuries caused by materials or appliances, as for instance, any negligence of insured itself with respect to such materials. This latter class might be held to embrace actions for injuries caused by negligence of the insured in giving peremptory orders to workmen of a subcontractor in handling materials when such orders are given through an authorized officer or agent of the insured who is not an "employee" within the meaning of that term as used in the policy.

One of the grounds of recovery alleged in the second amended petition in the Harper case was that the defendants therein, the insured and Paugh Brown, Inc., were guilty of negligence in peremptorily ordering and commanding the subcontractor's workmen who were supporting the plate in an upright position, to abandon their task in favor of another, thereby causing such plate to buckle and topple over upon Harper, as a result of which he sustained injuries. It may be stated parenthetically that although the petition in Harper's case was dismissed as to defendant Paugh Brown, Inc., the legal aspect of that case was not thereby changed. Negligence was charged without any averment to show through whom the alleged wrong was committed. No reference was made to the inspector by name or otherwise or to any officer, agent or employee of the insured or its then codefendant. The alleged acts of negligence may have been committed by one who was the alter ego of the insured (as a managing officer for instance) and not an "employee."

There was a question as to whether the insured participated in giving the peremptory order, and, if so, whether it was given under such circumstances as to constitute actionable negligence on the part of the insured. How was this question to be determined?

In Bloom-Rosenblum-Kline Co. v. Union Indemnity Co., supra, Judge Matthias, at page 226 of the opinion, stated:

"If the facts set up in Terihay's [the plaintiff's] petition had been established in the trial of that case [the damage case], and a judgment rendered therein, the insurance company would have been required under the liability clause of its policy to satisfy that judgment to the extent of the amount specified in its policy."

The same principle applies here. If a judgment had been rendered for negligence in giving the peremptory order through an authorized representative who could not have been deemed an employee, like satisfaction by the insurer would have been required. Whether there was a liability for negligence in giving such a peremptory order could not be determined until the Harper case was finally disposed of.

Accordingly in respect to coverage the situation that confronted the insurer in determining its course in defending the Harper suit, related to potential rather than ultimate liability for indemnification.

If the plaintiff, Harper, were to recover, it would be to the insurer's interest to have the recovery based on the sole ground that Northam was an employee of insured and guilty of negligence in the course of his employment, because the policy did not cover loss for injuries caused by any employee of the insured; but it would be to insured's interest to have such a recovery based upon a ground that brought the judgment within the coverage of the policy.

Thus in making defense the interest of the insurer came into conflict with the interest of the insured. The insurer sought to avoid any liability to indemnify insured for recoverable damages by giving notice of claimed nonliability, inviting the insured to employ counsel of its own choice for its own protection and allowing them to participate in the case and by attempting at the same time to perform its (insurer's) conceded contractual obligation to defend by requiring its own counsel to keep control of the defense at all times.

As a result, the insured was confronted with a hazard which justified it in employing its own counsel for its protection — protection the insurer plainly indicated it would not give. The insured met the hazardous situation by employing counsel under protest and notifying the insurer that it must bear the expense.

The insurer did not accept or reject the condition that it bear the expense, and so informed the insured of its inaction. Insurer, however, permitted and in fact through counsel encouraged insured's counsel to participate in the proceedings at all times. Even after judgment in the Court of Common Pleas and pending an appeal to the Court of Appeals, counsel for the insured wrote counsel for the insurer and asked them to assume full responsibility for the defense and relieve the insured from incurring further expense. The insurer replied that it would maintain its former position.

As the hazard was created by the action of the insurer in placing itself in a position in which it could not and did not fully and completely perform its contractual obligation to make defense, the insured is entitled to recover reasonable attorney fees, and proper expenses on the ground that insurer breached its contract. Boise Motor Car Co. v. St. Paul Mercury Indemnity Co., 62 Idaho 438, 112 P.2d 1011. Sec 8 Appleman's Insurance Law and Practice, 36, Section 4691. The insurer, having agreed in its contract of insurance to make defense at its own expense, could not in such manner pass part of the expense thereof on to the insured.

Under the uncontroverted facts the Court of Appeals was justified as a matter of law in reversing the judgment of the Municipal Court, and rendering final judgment in favor of the insured for attorney fees and expenses in the sum of $2,341.82, which it was agreed was reasonable and proper in amount.

For the reason given, the judgment of the Court of Appeals is affirmed.

Judgment affirmed.

WEYGANDT, C.J., ZIMMERMAN, TURNER, MATTHIAS, and HART, JJ., concur.

BELL, J., concurs in paragraphs one and two of the syllabus and in the judgment.


Summaries of

Socony-Vacuum Oil Co. v. Cas. Co.

Supreme Court of Ohio
Jan 24, 1945
144 Ohio St. 382 (Ohio 1945)

finding that where the pleadings unmistakably bring action within the coverage of the policy, the duty to defend will attach

Summary of this case from Elevators Mutual Ins. Co. v. Scassa

In Socony, after defending the case for a year, the insurer's counsel, by way of a reservation of rights letter, incorrectly advised the insured that it could not protect the insured's interests and its own. Socony, 144 Ohio St. at 386-387, 390-391.

Summary of this case from Red Head Brass v. Buckeye Union Ins

In Socony-Vacuum, the facts indicated that such a conflict was present, since, in that case, a question arose whether the alleged tortfeasor was an employee of the insured acting within the scope of his employment.

Summary of this case from Lusk v. Imperial Casualty & Indemnity Co.
Case details for

Socony-Vacuum Oil Co. v. Cas. Co.

Case Details

Full title:SOCONY-VACUUM OIL CO., APPELLEE v. CONTINENTAL CASUALTY CO., APPELLANT

Court:Supreme Court of Ohio

Date published: Jan 24, 1945

Citations

144 Ohio St. 382 (Ohio 1945)
59 N.E.2d 199

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