Title: Towne Realty, Inc. v. Zurich Insurance Company

State: wisconsin

Issuer: Wisconsin Supreme Court

Document:

No. 94-1743 
 
   
 
 
 
 
 
 
 
NOTICE 
This opinion is subject to further 
editing and modification.  The final 
version will appear in the bound 
volume of the official reports.   
 
 
 
 
No.  94-1743 
 
STATE OF WISCONSIN             :                IN SUPREME COURT 
                                                                   
 
 
Towne Realty, Inc., 
Joseph Zilber, 
Donald Grande and 
Gerald Stein, 
 
 
Plaintiffs-Respondents, 
 
 
v. 
 
Zurich Insurance Company, 
 
 
Defendant-Appellant-Petitioner. 
 
 
FILED 
 
 
MAY 22, 1996 
 
 
 Marilyn L. Graves 
  Clerk of Supreme Court 
  
Madison, WI  
                                                                 
  
 
 
 
 
REVIEW 
of 
a 
decision 
of 
the 
Court 
of Appeals.    
Affirmed in part and reversed in part.   
 
DONALD W. STEINMETZ, J.  This case presents the following 
three issues concerning the breach of an insurer's duty to defend 
and the resulting damages from such a breach:  (1) what 
constitutes a "tender of defense" under an insurance contract; (2) 
whether legal defense expenses incurred before the tender are 
allowable as damages; and (3) when, if ever, is an insurer 
responsible for the legal expenses involved in pursuing a 
countersuit.  We hold that  a tender of defense occurs when the 
 
No. 94-1743 
 
 
 
2 
insurer has notice that there is a claim against the insured.  
Further, we hold that even if an insurer does breach its duty to 
defend, the insurer cannot be held liable for either those 
expenses incurred by the insured before the insurer has been put 
on notice or those incurred by the insured in prosecuting a 
countersuit, unless, of course, the contract so provides. 
 
 Towne Realty, Inc., Joseph Zilber, Donald Grande and Gerald 
Stein (collectively the "Insureds") filed this action claiming 
that Zurich Insurance Company ("Zurich") breached its duty to 
defend the Insureds against a suit brought by Joseph and Leslie 
West Balestrieri.  The Balestrieris sued the Insureds on October 
11, 1991, for damages resulting from various alleged wrongdoings 
including breach of contract, tortious interference with contract, 
negligent and intentional misrepresentation and breaches of 
fiduciary duty.  On October 21, 1991, an agent of Towne Realty 
sent a letter to Zurich advising Zurich of the suit.  The 
pertinent portions of this letter read: 
 
At this time, the enclosed information is not being 
submitted as a claim.  I am sending it to your attention 
for review and discussion. 
 
 
As it is an unusual and complicated situation, we would 
first like to see Zurich's insight into potential 
position on extent of coverage. 
 
 
 
. . .  
 
 
At present, we have retained the services of Attorney 
Michael Wherry with the firm Davis and Kuelthau in 
Milwaukee, WI and would like to continue his services as 
he is well acquainted with the intricacies of this 
matter. 
 
No. 94-1743 
 
 
 
3 
A copy of the summons and complaint was also attached to this 
letter filed by the Balestrieris.  Zurich's only response to this 
letter was an acknowledgement of its receipt and creation of a 
claim file on October 24, 1991.  Zurich did not respond to Towne 
Realty's query regarding coverage until May 18, 1992, when it sent 
a letter denying coverage and refusing to defend against the 
action. 
 
Although some correspondence continued between the Insureds 
and Zurich, this denial of coverage ultimately led to the Insureds 
seeking summary judgment in a declaratory judgment action filed 
against Zurich on May 6, 1993, in Milwaukee County.  The trial 
court, Honorable Patricia S. Curley, determined that the policy 
covered the types of actions alleged by the Balestrieris and 
granted summary judgment in the Insureds' favor.  During 
subsequent hearings, Judge Curley also held that the October 21, 
1991, letter constituted a proper tender of defense and that the 
expenses incurred by the Insureds before October 21, 1991, and 
those expenses associated with the Insureds' pursuit of various 
counterclaims against the Balestrieris were recoverable as damages 
flowing from Zurich's breach of its duty to defend.  The court of 
appeals affirmed the circuit court on all three issues, with 
Presiding Judge Thomas Cane dissenting on the issues of recovery 
of pre-tender and countersuit expenses.  See Towne Realty, Inc. v. 
Zurich Ins. Co., 193 Wis. 2d 544, 534 N.W.2d 886 (Ct. App. 1995). 
  
In order to fully understand the questions presented by this 
 
No. 94-1743 
 
 
 
4 
case, 
it 
is 
necessary 
to 
further 
discuss 
the 
underlying 
Balestrieri action.  The Insureds incurred significant legal 
expenses in the 11 days after the Balestrieri suit was initiated, 
but before they first contacted Zurich.  The Insureds claim that 
because of the high level of publicity garnered by the suit, these 
expenses, which included strategizing on media control and 
preparing for injunctive relief to protect crucial documents in 
control of the Balestrieris, were a necessity.  They were 
allegedly facing an "emergency" situation which required immediate 
legal attention. 
 
After receiving no response from Zurich other than the 
October 24, 1991, acknowledgement of receipt, the Insureds 
continued to defend against the Balestrieri action.  In November 
or December of 1991, the Insureds individually filed responsive 
pleadings, which included a number of counterclaims, to the 
Balestrieri suit.  Then, after various hearings and motions, the 
Balestrieri suit was dismissed without prejudice on January 21, 
1992. 
 
The 
Insureds, 
however, 
continued 
to 
pursue 
their 
counterclaims until June 4, 1993.  The damages sought by the 
Insureds, therefore, can be broken into three "sets":  (1) those 
expenses incurred prior to notifying Zurich of the suit; (2) those 
expenses incurred "defending" the Balestrieri suit; and finally 
(3) those expenses incurred in pursuing counterclaims against the 
Balestrieris. 
 
No. 94-1743 
 
 
 
5 
 
Of the three issues presented by this case, the first and 
foremost is whether the Insureds ever effectuated a tender of 
defense.  Obviously, if a tender of defense had not been made, or, 
as argued by Zurich in the alternative, the Insureds in Towne 
Realty's October 21, 1991, letter specifically requested Zurich 
not to take part in the defense of the Balestrieri suit, then 
Zurich would not be liable for any damages.  It is only if the 
October 21, 1991, letter constituted a tender of defense that the 
remaining two issues must be addressed. 
 
As the court of appeals recognized, the sufficiency of a 
tender of defense is a question of first impression in the State 
of Wisconsin.  See Towne Realty, 193 Wis. 2d at 557.  Since it 
entails the application of a set of undisputed facts to a legal 
standard, it is a question of law which we answer without 
deference to the trial court or the court of appeals.  See 
Nottelson v. ILHR Department, 94 Wis. 2d 106, 116, 287 N.W.2d 763 
(1980). 
 
 The court of appeals identified a split in those authorities 
which have considered the sufficiency of a tender of defense under 
an insurance contract.  See Towne Realty 193 Wis. 2d at 558.  
Several courts have held that an insurer only needs to be put on 
notice for the duty to defend to be invoked.  See White Mountain 
Constr. v. Transamerica Ins., 631 A.2d 907, 910 (N.H. 1993); 
Widener Univ. v. F.S. James & Co., 537 A.2d 829, 833 (Pa. Super. 
Ct. 1988); Cobb v. Empire Fire & Marine Ins. Co., 488 So. 2d 349, 
 
No. 94-1743 
 
 
 
6 
350 (La. Ct. App. 1986).  Other courts require the insurer to 
specifically request the insurance company to defend the suit.  
See, e.g., Hartford Acc. & Indem. Co. v. Gulf Ins. Co., 776 F.2d 
1380, 1383 (7th Cir. 1985); Casualty Indem. Exchange Ins. Co. v. 
Liberty Nat'l Fire Ins. Co., 902 F. Supp. 1235, 1239 (D. Mont. 
1995); Litton Systems, Inc. v. Shaw's Sales & Serv., Ltd., 579 
P.2d 48, 52 (Ariz. Ct. App. 1978).  The court of appeals found the 
first position more persuasive.  See Towne Realty, 193 Wis. 2d at 
558. 
 
We agree with both the conclusion and the analysis of the 
court of appeals.  A tender of defense occurs once an insurer has 
been put on notice of a claim against the insured.  This approach 
"discourages the insurer . . .  from defaulting in the performance 
of its duty to defend."  White Mountain, 631 A.2d at 910.  
Furthermore, placing the duty upon the insurer is not as onerous 
as placing the duty upon the insured:  insurers are usually more 
sophisticated and knowledgeable than insureds regarding the 
insurer's duty to defend and insurers are in a better position 
than insureds to facilitate clear communication between the 
parties. 
 
There is no doubt that Zurich had notice that a suit had been 
initiated against the Insureds.  The Insureds attached a copy of 
the summons and complaint to their October 21, 1991, letter.  
Zurich, therefore, was not only aware of the suit as of this date, 
but was also aware of the specific claims alleged against the 
 
No. 94-1743 
 
 
 
7 
Insureds.  As was its right, Zurich denied coverage based upon a 
reasonable belief that the claims contained in the complaint were 
not covered by the insurance policy.  However, since the circuit 
court subsequently determined that the claims were covered by the 
policy and that Zurich had improperly denied coverage, Zurich is 
liable for all damages flowing from its breach of its duty to 
defend as of October 21, 1991, the date it was put on notice of 
the suit. 
 
Zurich, however, argues, in the alternative, that even if the 
October 21, 1991, letter qualifies as an adequate tender of 
defense, the language of the letter waives Zurich's duty to defend 
by explicitly stating that the suit was not being submitted as a 
claim.  Although Zurich argues this position vehemently, it is not 
persuasive under the facts of this case.  The language of the 
October 21, 1991, letter is not nearly as clear or as explicit as 
Zurich claims.  Instead, the letter is at best ambiguous and can 
easily be read, as the court of appeals noted, to support the 
Insureds' position that the letter was "a request that Zurich 
assume defense of the action."  Towne Realty, 193 Wis. 2d at 559. 
  
This court has repeatedly held that "[i]f there is any doubt 
about the duty to defend, it must be resolved in favor of the 
insured."  Shorewood School Dist. v. Wausau Ins., 170 Wis. 2d 347, 
364, 488 N.W.2d 82 (1992); see also, e.g., Elliott, 169 Wis. 2d at 
321.  Although these holdings specifically apply to the question 
of whether coverage exists under a contract, underlying these 
 
No. 94-1743 
 
 
 
8 
decisions is the general realization that the insurer is in a 
superior position to the insured in relation to the formation and 
interpretation of the insurance contract.  Therefore, we hold that 
if it is unclear or ambiguous whether the insured wishes the 
insurer to defend the suit, it becomes the responsibility of the 
insurer to communicate with the insured before the insurer 
unilaterally forgoes the defense.
1   This places the "burden of 
ensuring clear communication between the insurer and insured on 
the insurer, who is better positioned, in terms of expertise and 
resources, to manage such a task."  White Mountain Const., 631 
A.2d at 910.   Despite Zurich's protestations, this holding should 
not create an onerous duty for insurers:  a simple letter 
requesting 
clarification 
of 
the 
insured's 
position 
should 
suffice.
2     
 
In this case, however, Zurich did not even attempt to 
determine if the Insureds' wished Zurich to take over the defense 
or if they simply sought Zurich's position on coverage.  Instead, 
                     
     
1 There would not, of course, be a duty on the part of the 
insurer to contact the insured if correspondence from the insured 
explicitly stated that it was waiving its contractual right to a 
defense. 
 
The 
October 
21, 
1991, 
letter, 
however, 
hardly 
constitutes a waiver. 
     
2 The insurer fulfills its duty once it requests the insured 
for 
clarification 
of 
its 
position. 
 
If 
the 
insured 
is 
uncooperative or unresponsive, the insurer need not pursue the 
matter further.  This will prevent a sophisticated insured from 
intentionally vacillating on whether it wants the insurance 
company to defend the action and, then, after significant legal 
expenses have accumulated, demanding indemnification.   
 
No. 94-1743 
 
 
 
9 
Zurich ignored the Insureds' multiple attempts to communicate with 
it and waited months before it even responded with a position on 
coverage.  In fact, it wasn't until February 11, 1994, that Zurich 
gave any indication that it did not consider the October 21, 1991, 
letter an adequate tender.  When faced with an ambiguous 
communication from an insured, such as the October 21, 1991, 
letter, an insurer cannot engage in this type of behavior and 
simply "assume" that the insured does not wish a defense.  
Instead, it has an affirmative duty to specifically determine that 
a defense is not desired.  Zurich did nothing to meet this duty.  
  
 
Zurich, therefore, is liable for any expenses incurred by the 
Insureds in defending against the Balestrieri suit from the date 
Zurich had notice of the claim, October 21, 1991, until the date 
the Balestrieri suit was dismissed, January 21, 1992.  Two 
questions, however, remain:  (1) is Zurich liable for the 
Insureds' expenses incurred between October 11, 1991, and October 
21, 1991, the so-called "pre-tender" expenses, and (2) is Zurich 
liable for the expenses associated with the Insureds' pursuit of 
various counterclaims against the Balestrieris.  Since the proper 
measure of damages for an insurer's breach of its duty to defend 
is a question of law, we review both questions de novo without 
deference to the trial court or the court of appeals.  See 
Newhouse v. Citizens Security Mut. Ins., 176 Wis. 2d 824, 837, 501 
N.W.2d 1 (1993).   
 
No. 94-1743 
 
 
 
10 
 
The court of appeals held that Zurich is liable for all pre-
tender expenses.  See Towne Realty, 193 Wis. 2d at 561.  We 
disagree.  Zurich can only be liable for damages which "naturally 
flow" from its breach of a contractual duty.  Newhouse, 176 Wis. 
2d at 837.   Zurich had no duty to defend until it had been put on 
notice that there was a claim against the Insureds.   As the 
Minnesota Supreme Court recognized in a similar situation, a 
tender of defense is a condition precedent to the creation of a 
duty to defend.  See SCSC Corp. v. Allied Mut. Ins. Co., 533 
N.W.2d 603, 614 (Minn. 1995).   Since Zurich's duty to defend did 
not attach until October 21, 1991, any expenses which the Insureds 
incurred before this time, unless specifically allowed by the 
contract,
3 cannot flow from Zurich's breach of this duty.  To hold 
otherwise would require Zurich to have breached a contractual duty 
on October 10, 1991, that did not even exist until October 21, 
1991.   
 
This court reached a similar conclusion in Pitrowski v. 
Taylor, 55 Wis. 2d 615, 201 N.W.2d 52 (1972).  In Pitrowski we 
held that an insurer was not liable for certain attorney fees 
since prior to incurring such fees the insured neither made a 
tender of defense nor requested authorization from the insurer for 
                     
     
3 In this case, the contract specifically does not allow pre-
tender expenses to be incurred unless necessary for first aid.  
Despite asserting the "emergency" nature of the Balestrieri 
action, the Insureds do not claim that the situation was so 
egregious that "first-aid" was required.  
 
No. 94-1743 
 
 
 
11 
such expenses.  See id. at 626.  Zurich, like the insurer in 
Pitrowski, did not have a duty to defend at the time the expenses 
in question were incurred because no tender of defense had been 
made.  The fact that Zurich did eventually breach its duty and the 
insurer in Pitrowski did not is a distinction without a difference 
in relation to the issue of pre-tender expenses.  
 
The final question before this court is whether Zurich is 
liable for the expenses incurred by the Insureds in prosecuting 
the counterclaims against the Balestrieris.  In Newhouse we held 
that damages which naturally flow from a breach of a duty to 
defend include:  "(1) the amount of the judgment or settlement 
against the insured plus interest; (2) costs and attorney fees 
incurred by the insured in defending the suit; and (3) any 
additional costs that the insured can show naturally resulted from 
the breach."  Newhouse, 176 Wis. 2d at 838 (emphasis added).  Only 
legal expenses incurred while "defending the suit" against the 
insured are recoverable.    
 
Although 
Newhouse 
does 
not 
specifically 
define 
what 
constitutes "defending the suit," it is clear that countersuits 
are not included under the language of the insurance contract in 
this case.  According to the contract, Zurich only has a duty to 
defend "any suit seeking . . . damages" against the Insureds.  
This 
court 
interpreted 
insurance 
contract 
language 
almost 
identical to this to mean exactly what it says:  "the only duty 
imposed on the insurer[] is to defend against suits seeking 
 
No. 94-1743 
 
 
 
12 
damages from the insureds."   City of Edgerton v. General Cas. 
Co., 184 Wis. 2d 750, 765, 517 N.W.2d 463 (1994), cert. denied, 
115 S.Ct. 1360 (1995).  This language clearly precludes recovery 
of expenses for offensive actions taken by the insured.  At risk 
of stating the obvious, a countersuit initiated by the insured 
cannot logically be a suit seeking damages from the insured.   
 
The Insureds assert, though, that an exception should be made 
in situations such as this where the prosecution of a counterclaim 
is necessary to fully defend the original suit.  They argue that 
it was the vigorous advancement of the countersuit which was 
ultimately responsible for the quick dismissal of the Balestrieri 
action.  However, as Judge Cane perceptively observed in his 
dissent, although "[i]t may be true that a good defense is a good 
offense, . . . that does not create an obligation beyond the terms 
of the insurance policy . . . ."  Towne Realty, 193 Wis. 2d  at 
569-70.  The insurance contract simply does not establish an 
obligation on the part of Zurich to indemnify the Insureds for the 
pursuit of counterclaims.  If Zurich had been performing the 
defense of the suit, the Insureds certainly could not have 
required Zurich to pursue a counterclaim.  The same reasoning is 
applicable when determining Zurich's liability due to its breach 
of contract.  It is a basic tenent of contract law that a party is 
not entitled to greater damages than what he or she would have 
received under the contract if the defaulting party would have 
 
No. 94-1743 
 
 
 
13 
fully performed.
4   By the Court.—The decision of the court of 
appeals is affirmed in part and reversed in part.   
 
SHIRLEY S. ABRAHAMSON, J., did not participate.   
                     
     
4 Of course, contract damages can also include consequential 
and incidental damages.  The expenses at issue, however, clearly 
do not fall into either of these categories. 
 
No. 94-1743 
 
 
 
 
SUPREME COURT OF WISCONSIN 
 
                                                              
 
Case No.: 
 
94-1743 
                                                              
 
Complete Title 
of Case: 
Towne Realty, Inc., Joseph Zilber, 
 
 
 
Donald Grande and Gerald Stein, 
 
 
 
 
Plaintiffs-Respondents, 
 
 
 
 
v. 
 
 
 
Zurich Insurance Company, 
 
 
 
 
Defendant-Appellant-Petitioner. 
 
 
 
____________________________________ 
 
 
 
 
REVIEW OF A DECISION OF THE COURT OF APPEALS 
 
 
 
Reported at:  193 Wis. 2d 544, 534 N.W.2d 887 
 
 
 
 
 
 
(Ct. App. 1995) 
 
 
 
 
 
 
PUBLISHED 
 
                                                              
 
Opinion Filed:  
May 22, 1996 
Submitted on Briefs: 
 
Oral Argument: 
April 2, 1996 
 
                                                              
 
Source of APPEAL 
 
COURT: 
Circuit 
 
COUNTY: 
Milwaukee 
 
JUDGE: 
PATRICIA S. CURLEY 
 
                                                              
 
JUSTICES: 
 
 
Concurred: 
 
 
Dissented: 
 
 
Not Participating: 
ABRAHAMSON, J., did not participate 
                                                              
 
ATTORNEYS:  
For the defendant-appellant-petitioner there were 
briefs by Robert Marc Chemers, Scott L. Howie and Pretzel & 
Stouffer, Chartered, Chicago, IL and Paul J. Pytlik and Otjen, Van 
Ert, Stangle, Lieb & Weir, S.C., Milwaukee and oral argument by 
Scott L. Howie. 
 
 
For the plaintiffs-respondents there was a brief by James E. 
Culhane, Michael R. Wherry and Davis & Kuelthau, S.C., Milwaukee 
and oral argument by Michael R. Wheery. 
 
 
No. 94-1743 
 
 
 
Amicus curiae was filed by Susan R. Tyndall and Hinshaw & 
Culbertson, Milwaukee for the Civil Trial Counsel of Wisconsin and 
Wisconsin Insurance Alliance.