Opinion ID: 901146
Heading Depth: 1
Heading Rank: 2

Heading: Attorney's Fees for Defending Declaratory Action

Text: [¶ 7.] Wagaman seeks to recover from the PEPL fund her attorney's fees incurred in this declaratory action. [3] Under the American Rule, the rule prevailing in South Dakota, parties to litigation are required to pay their own attorney's fees, absent an agreement, statute, or rule to the contrary. [4] SDCL 15-17-38; Boland v. City of Rapid City, 315 N.W.2d 496, 503 n. 4 (S.D.1982). In cases where insureds have sought to recover attorney's fees against commercial insurers in declaratory judgment actions, those courts applying the traditional American Rule have refused to allow recovery. [5] In other jurisdictions, the traditional rule has been modified or abrogated, by statute or court rule. See Annotation, Jane Massey Draper, Insured's Right To Recover Attorney's Fees Incurred in Declaratory Judgment Action To Determine the Existence of Coverage Under Liability Policy, 87 ALR3d 429 (1978). [¶ 8.] No provision in the South Dakota's Declaratory Judgment Act allows for an award of attorney's fees to the prevailing party. [6] See SDCL ch 21-24. Wagaman asserts that § 58-12-3, a provision in our insurance code, authorizes attorney's fees when an insurer's refusal to defend its insured is vexatious and unreasonable. She also contends that the PEPL fund contract provides for attorney's fees in declaratory actions. [7] For the reasons explained below, we conclude that she is not entitled to recover her attorney's fees in a declaratory action against the PEPL fund. [¶ 9.] The statute Wagaman cites as authority for recovering her attorney's fees provides as follows: In all actions or proceedings hereafter commenced against any employer who is self-insured, or insurance company, including any reciprocal or interinsurance exchange, on any policy or certificate of any type or kind of insurance, if it appears from the evidence that such company or exchange has refused to pay the full amount of such loss, and that such refusal is vexatious or without reasonable cause, ... the trial court and the appellate court, shall, if judgment or an award is rendered for plaintiff, allow the plaintiff a reasonable sum as an attorney's fee to be recovered and collected as a part of the costs[.] SDCL 58-12-3 (emphasis added). Wagaman contends that because South Dakota is a self-insured employer and because the PEPL fund vexatiously and unreasonably refused to defend her in the federal suit, she is entitled to her attorney's fees. On several occasions, this Court has characterized the PEPL fund as a liability self-insurance pool. PEPL v. Winger, 1997 SD 77, ¶ 8, 566 N.W.2d 125, 128 n. 5; Kyllo v. Panzer, 535 N.W.2d 896, 900 (S.D.1995); see generally In re Request for Opinion of Supreme Court, 379 N.W.2d 822 (S.D. 1985). Also, because the concepts are similar to insurance, we have adopted insurance law principles in cases of employee coverage questions. See PEPL v. Winger, supra . In Winger, we used those principles in interpreting the statutory provisions governing the PEPL fund to decide what acts fell within an employee's scope of employment. SDCL 3-22-2(13). [¶ 10.] Yet, we have never held the PEPL fund accountable under our insurance code. To do so would be to ignore the plain text of § 3-22-18: The PEPL does not constitute insurance nor may it be considered an insurance company under the laws of South Dakota nor is the PEPL under the jurisdiction of the commissioner of insurance. Thus, whatever name one might ascribe to it, the PEPL fund is not insurancenot self-insurance, reciprocal insurance, or interinsurance. In creating the PEPL fund and enacting § 3-22-18, the Legislature obviously intended to distinguish between this public liability pool and traditional insurance by excluding the PEPL fund from laws regulating traditional insurance companies. Cf., e.g., City of Arvada v. Colorado Intergovernmental Risk Sharing Agency, 19 P.3d 10, 13 (Colo 2001). [¶ 11.] The rationale for exempting the PEPL fund from the strictures of the insurance code is apparent. As one California appellate court explained in dealing with a similar fund: [To subject a self-insurance pool] to the statutory requirements of the Insurance Code would place member entities in the position of having the same duties and obligations as commercial insurers.... Such an arrangement would adversely affect the pool's ability to provide members cost-effective liability coverage and subsequently defeat the purpose and intent of these self-insuring groups. City of South El Monte v. Southern Cal. Joint Powers Ins. Auth., 38 Cal.App.4th 1629, 45 Cal.Rptr.2d 729, 731 (1995). [8] [¶ 12.] SDCL 58-12-3 is an insurance code provision applicable to insurers, self-insurers, and insurance companies. We rigorously defined the scope of an earlier version of § 58-12-3 in the case of Ofstad v. DOT, 387 N.W.2d 539 (S.D.1986). There, we held that because the employer was not an insurer as that term was defined in our statutes, the employer could not be held liable for attorney's fees as an insurer under § 58-12-3. Here, the circuit court apparently assumed for the sake of argument that § 58-12-3 applied and then ruled that the PEPL fund's actions in refusing to defend Wagaman and in seeking declaratory relief were not vexatious or unreasonable. We need not go that far. Because § 58-12-3 is inapplicable against the PEPL fund, there is no need to decide whether the fund's actions were vexatious. [¶ 13.] Wagaman next contends that her attorney's fees in this declaratory action may be awarded under the terms of the PEPL fund's Memorandum of Liability Coverage. Usually, the ultimate determiner in issues over coverage is the liability contract itself. Questions of coverage are properly answered by adverting to the rules of contract law that rely on the intent of the parties. The rules governing the PEPL fund are contained in SDCL ch 3-22 and in the contractual provisions of the Participation Agreement Between the Public Entity Pool for Liability and the State of South Dakota, with its attached Memorandum of Liability Coverage. The Memorandum provides for both damage coverage and defense coverage. The section providing for defense coverage states that defense costs are payable in addition to the coverage limit. The Memorandum then defines defense costs as fees and expenses generated by and related to the adjustment, investigation, defense or litigation of a claim, including attorney's fees. (Emphasis added.) Wagaman then argues that attorney's fees in this declaratory judgment action are clearly related to the defense and litigation of the claim, and clearly constitute defense costs to which she is entitled by contract. [¶ 14.] The contract memorialized in the Participation Agreement and attached Memorandum is between the PEPL fund and State of South Dakota. Wagaman paid no premiums in return for coverage and had no direct contractual relationship with the PEPL fund. The circuit court ruled that as a state employee covered under the PEPL fund agreement, she was entitled to damage coverage and defense coverage in the federal suit. However, the Memorandum did not authorize payment of attorney's fees in a declaratory judgment action. The specific language of the Memorandum refers to defense coverage and states that the PEPL fund will defend any claim or suit for damages not excluded hereunder. Within the same section, the Memorandum states that defense costs are payable in addition to the coverage limit. But, as detailed above, defense costs must be generated by and related to ... a claim. (Emphasis added.) A claim is any claim or suit for damages, not a suit for declaratory judgment. [9] [¶ 15.] We affirm the circuit court's grant of summary judgment, although not for the same reasons the court gave.