In Iowa National Mutual Insurance Co. v. Liberty Mutual Insurance Co., 43 Wis.2d 280, 168 N.W.2d 610 (1969), the Wisconsin Supreme Court (did approve the use of the declaratory judgment procedure for determining an insurer's duty to defend.Summary of this case from American Motorists Ins. Co. v. Trane Co.
Argued June 2, 1969. —
Decided June 27, 1969.
APPEAL from an order of the circuit court for Walworth county: ERNST JOHN WATTS, Circuit Judge. Reversed, with directions.
For the appellant there was a brief by Block Summers, attorneys, and Richard E. Rosenberg of counsel, all of Janesville, and oral argument by Mr. Rosenberg.
For the respondents there was a brief by Kenney, Korf Pfeil of East Troy, and oral argument by Francis J. Korf.
The plaintiff Iowa National Mutual Insurance Company (Iowa) commenced this action under sec. 269.56, Stats., against the defendant Liberty Mutual Insurance Company (Liberty) and its insured Oliver M. Byerly (Byerly) for a judgment declaratory of its rights under its liability policy. Mr. Byerly died during the pendency of this action and Ann Byerly, the executrix of his estate, was substituted for him. Liberty answered the complaint but Byerly demurred on the ground the complaint failed to state facts sufficient to constitute a cause of action, i.e., that no justiciable issue was presented. From the complaint it appears that Byerly, who was engaged in selling jack stands, sold a jack stand to Weaver Manufacturing Company (Weaver), a distributor in Illinois who sold it to Duncan-Hunter Corporation (Duncan), a distributor in California who sold it to Gardena Bus Lines, Inc. (Gardena) in California. Gardena used the jack stand and its employee Marshall was injured while working under a bus when the jack stand allegedly collapsed. On April 8, 1963, Marshall brought a suit against Weaver, Duncan, and others, in California to recover damages for his injuries.
Between July 5 and July 13, 1963, and before the trial, Weaver notified Byerly of the Marshall accident and the suit. At that time Byerly informed Weaver that he was insured by Iowa but Byerly did not notify Iowa of the accident until August 25, 1965, approximately two years later, when he forwarded to Iowa's agent Weaver's recent letter of August 18, 1965, demanding he defend the Marshall suit and pay any judgment which might be obtained against Weaver. On December 30, 1965, Marshall recovered judgment against Weaver for $68,000, which judgment the liability insurer of Weaver, the Liberty Mutual Insurance Company (defendant in this case) paid. Thereafter, on August 24, 1966, Liberty, pursuant to subrogation rights, sued Byerly in the federal district court for the Eastern District of Wisconsin for indemnification and for the cost of defending the California action. The defense was tendered by Byerly to Iowa. On September 7, 1966, Iowa and Byerly executed a reservation of rights agreement in which Iowa agreed to defend the federal court action but reserved its right to assert its policy defense against Byerly and the right to withdraw from the defense upon giving a ten days' notice. Previously, on September 15, 1965, after Iowa was first notified of Weaver's letter, it executed with Byerly a nonwaiver of rights agreement.
Iowa undertook the defense of the federal case on behalf of Byerly under its reservation of rights agreement and on November 7, 1966, brought this suit to determine its rights under its policy. The trial court treated Byerly's demurrer as a plea in abatement and decided it would make no declaration of the rights of the parties until Iowa had withdrawn its defense in the federal court action or until the liability of Byerly had been determined in that action. From this order, Iowa appeals.
A demurrer to a complaint for declaratory relief is a proper pleading to raise the question of whether there exists a justiciable issue. Boerschinger v. Elkay Enterprises, Inc. (1965), 26 Wis.2d 102, 132 N.W.2d 258, 133 N.W.2d 333. The admission of facts by the demurrer is to test the sufficiency of the complaint not to settle facts as a verity or as a basis for a judgment declaring rights. An action for declaratory judgment is not open to an objection on the ground that a declaratory judgment or decree is sought. However, in sec. 269.56(6), Stats., the trial court is given the discretion to "refuse to render or enter a declaratory judgment or decree where such judgment or decree, if rendered or entered, would not terminate the uncertainty or controversy giving rise to the proceeding." This discretionary power is not concerned with entertaining the action or considering the merits of the case but with entering or declining to enter the judgment or decree. In Miller v. Currie (1932), 208 Wis. 199, 203, 242 N.W. 570, we stated in reference to this discretionary power, "The discretion conferred by sub. (6) may therefore be exercised only upon the record as it exists when the entry of a judgment would be appropriate."
Consequently, the trial court was in error in treating the demurrer as a plea in abatement. When a justiciable issue is presented, a demurrer should be overruled and an answer put in and the rights declared. 1 Anderson, Declaratory Judgments (2d ed. 1951), p. 740, sec. 318. Incidentally, in the past in some actions for declaratory relief the rights have been declared in the opinion and the complaint dismissed, presumably on the theory that if the declaration is against the contentions of the plaintiff, the complaint should be dismissed. A suit for declaratory relief decided on the merits calls for a declaratory adjudication in the judgment whether the adjudication is in favor of or adverse to the plaintiff and the dismissal of the complaint is improper. State ex rel. Brill v. Spieker (1955), 271 Wis. 237, 72 N.W.2d 906; Liddicoat v. Kenosha City Board of Education (1962), 17 Wis.2d 400, 117 N.W.2d 369; City of Milwaukee v. Milwaukee County (1965), 27 Wis.2d 53, 133 N.W.2d 393.
Likewise, in the instant case the demurrer should have been decided as such. For the purpose of this appeal, we must view the trial court's order as one sustaining the demurrer on the ground no justiciable issue was then presented and therefore it is appealable. Lounsbury v. Eberlein (1957), 2 Wis.2d 112, 86 N.W.2d 12; State v. Chippewa Cable Co. (1963), 21 Wis.2d 598, 124 N.W.2d 616.
The issue presented is whether an insurer under a liability policy may have a declaration of its rights in respect to defending a pending lawsuit against its insured. Iowa argues that Byerly, its insured, breached the liability policy by failing to give notice of the accident "as soon as practical" and therefore it has no duty to defend the liability suit brought by Liberty against Byerly in federal court. Byerly contends Iowa is not entitled to declaratory relief because the question of its duty to defend does not create a justiciable controversy and the defense of the late notice goes only to liability under the policy, not the duty to defend, and to maintain a declaratory judgment action at this time would compound a conflict of interests between Iowa and Byerly which would be against public policy.
Iowa, by defending the federal case under a nonwaiver rights agreement and reservation of rights agreement, should not be foreclosed from bringing a suit for declaratory relief to determine its liability to defend under its policy. To do so would destroy the purpose and effectiveness of the nonwaiver agreement and the reservation of rights agreement. Such agreements are in the public interest and furnish temporary protection to the insured even though it may turn out he was not entitled to such protection. Without such an agreement, an insurer would be forced to deny liability in order to protect itself and its defenses. Such agreement granted no new rights to the insured and does not require Iowa to withdraw its defense or to wait until its liability is determined in federal court before it can have determined its duty to defend the action under the terms of its policy. Iowa did not waive its right to bring this suit.
Whether Iowa may at this time have its rights determined in a declaratory judgment action depends first upon the wording of its policy and second upon the purpose and scope of the Declaratory Judgments Act. The liability policy involved is not made a part of the record but the complaint alleges the requirement of giving notice of accident "as soon as practicable," a nonaction clause, and that Iowa "agreed to defend any suit against the insured alleging. . . ." This latter language would create a duty to defend, not a right to take over the defense.
If the insurance policy granted the insurer only a right to defend or to control the action brought against its insured, Iowa would not be entitled to declaratory relief to review its decision or to determine whether it ought to defend or not. If, however, as alleged in the complaint, this policy places a duty upon the insurer to defend suits brought against the insured as is common in liability policies, then the duty to defend may become the subject of a justiciable question. The issue presented by the complaint is whether the failure to give notice of the accident is a defense under the policy not only to the liability to pay if Byerly is held liable but also a defense to its duty to defend Byerly whether he is liable or not. It is this defense issue that Iowa wishes to be determined in this declaratory judgment action and the time element is of the essence.
We think there is justiciable issue involved and Iowa is entitled at this time to its adjudication. In the past, this court has denied relief under the Declaratory Judgments Act to insurers of automobile liability policies involving policy defenses on the ground that in Wisconsin such issues can be generally raised in the direct action suit against the insurer and it would be against public policy to allow the issue to be collaterally tried by declaratory relief. New Amsterdam Casualty Co. v. Simpson (1941), 238 Wis. 550, 300 N.W. 367. The Simpson Case was followed in Allstate Ins. Co. v. Charneski (1962), 16 Wis.2d 325, 114 N.W.2d 489, and the legislative policy was enunciated that the direct action statute was the basis which prevented an insurer of automobile liability insurance from taking advantage of the declaratory judgment.
In Charneski it was also pointed out that sec. 260.11, Stats. provided for a split or bifurcated trial on the questions of the liability of the insured and of insurance coverage which prevented the jury from becoming aware the conflict of interest. It was also pointed out that if the trial court required the negligence issue to be tried first, which was then generally the practice, the insurance company might have to give a free defense in some cases. In 1963 this court by court rule revised sec. 260.11 so that it is discretionary with the trial court to grant a bifurcated trial and to determine which issue is to be determined first. Consequently, in many cases policy defenses are now tried before the liability issue and if the insurance company is successful that ends the matter.
The instant case was anticipated in Charneski, when we stated, page 332, "Where such statute is not applicable, declaratory relief has been used," and we cited Hardware Mut. Casualty Co. v. Hartford Accident Indemnity Co. (1959), 6 Wis.2d 457, 95 N.W.2d 215. In that case while the issue was not directly raised, declaratory relief was used to settle the coverage question between two insurance companies being sued by a third party.
Byerly relies on Selective Ins. Co. v. Michigan Mut. Liability Ins. Co. (1967), 36 Wis.2d 402, 153 N.W.2d 523, as holding that declaratory relief cannot be granted or at least is premature because Byerly may not be found liable in the federal court suit. This case is not controlling. The issue there presented was whether the insurance coverage provided by the plaintiff and the defendant insurance companies was primary or secondary, and that issue was premature. But in the instant case we are dealing with the duty to defend, not the duty to pay, and either Byerly or Iowa must defend the pending federal court action. All the facts needed to determine if Iowa has a duty to defend have occurred. We think the question should be decided now.
Since the Uniform Declaratory Judgments Act provides in sec. 269.56(15), Stats., that it should be uniformly construed by the states and in harmony with the federal laws regarding declaratory judgments, it is desirous to consider decisions of other jurisdictions. While there seems to be a split of authority, we think the better line of decisions allows declaratory judgment on facts similar to those presented in this case. In Illinois apparently there is a split of authority in the intermediate appellate courts. In State Farm Mut. Automobile Ins. Co. v. Morris (1961), 29 Ill. App.2d 451, 173 N.E.2d 590, certiorari denied, 368 U.S. 878, 82 Sup. Ct. 124, 7 L.Ed.2d 79, no relief was granted, while in Farmers Automobile Ins. Asso. v. Janusick (1961), 30 Ill. App.2d 352, 174 N.E.2d 705, the court thought the issue of whether an accident was covered by the policy was a justiciable issue.
The fact an insurer has undertaken the defense of an insured with reservations has been held not to preclude its right to ask for declaratory judgment in respect to its liability to defend especially where it has reserved the right to withdraw from the defense and thereafter withdrew at the request of the insured. Maryland Casualty Co. v. Tindall (8th Cir. 1941), 117 F.2d 905. Most of the out-of-state cases allowing declaratory relief of insurance policies have construed questions of coverage including questions of ownership of the automobile, whether of permission of the driver within the meaning of the omnibus clause, whether the automobile was being operated by an unlicensed or prohibited driver, whether the automobile was being operated within the scope and purpose of the insured's business or carrying passengers for hire or for unpermitted or unauthorized use, and many similar coverage questions. See Annot. (1943), Application of declaratory judgment acts to questions in respect of insurance policies, 142 A.L.R. 8.
This annotation states, page 74: "The remedy of declaratory judgment has been considered proper to adjudicate an insurer's nonliability predicated upon the failure of the insured to give notice of the accident or of the claims or suits of the injured persons as required by the policy." See also 9A Uniform Laws Annotated, Declaratory Judgments, sec. 2, Notes 40 and 41. A case almost exactly in point, allowing declaratory relief, is Porter v. Alabama Farm Bureau Mut. Casualty Ins. Co. (1966), 279 Ala. 499, 187 So.2d 254, where the insurer refused to defend on the ground the insured had failed to give notice of the accident as soon as practicable.
Lastly, Byerly claims there is a conflict of interest and on the ground of public policy declaratory relief should not be granted while this exists. This argument is only partly true. The defense in the liability suit is Liberty's failure to give Byerly timely notice of the claim. In this suit, Iowa's position is that Byerly failed to give timely notice of the accident. These two problems do not necessarily raise a conflict of interest, but even if they did the conflict does not appear in the same action so as to create an embarrassment before the jury, which is avoided in automobile liability cases by bifurcating the trial. We do not consider inconsistent positions in separate concurrent suits to be of any greater evil than inconsistent positions in suits tried in sequence. Denial of declaratory relief would prolong the conflict — a declaration of rights would terminate it. By the Court. — The order is reversed, with directions to overrule the demurrer with leave to the defendant Byerly to plead to the merits.