Opinion ID: 1199575
Heading Depth: 2
Heading Rank: 1

Heading: State Farm's duty to prosecute an appeal from the circuit court's ruling in the underlying action

Text: State Farm claims that its duty to defend the Delmontes' case terminated upon the circuit court's entry of findings and conclusions, which constituted a judicial determination that the Delmontes' acts were not within the scope of insurance coverage. The Delmontes claim that State Farm's duty to defend included a duty both to appeal the circuit court's decision in the underlying action and to post a bond covering the judgment during the pendency of the appeal. The question whether the duty to defend includes a duty to appeal has not heretofore been directly addressed by the Hawai`i appellate courts. It is necessary to expand on our discussion in Commerce & Industry, supra, relied upon by the circuit court, in order to explain under what circumstances an insurer's duty to defend terminates subsequent to a circuit court's determination that the insured is liable, but that the insured's liability is outside of the coverage of any insurance policy. In Commerce & Industry, a complaint was filed against Bank of Hawai`i, the insured, that alleged covered and non-covered claims. The circuit court granted summary judgment in favor of the insured on the potential covered claims. However, this judgment was not certified as final pursuant to HRCP Rule 54(b). Commerce & Industry Insurance Company, the insurer, thereafter filed a declaratory judgment action seeking a declaration that its duty to defend ceased upon entry of summary judgment on the potentially covered claims. The circuit court concluded that the insurer's duty to defend continued until the termination of the litigation. On appeal, we affirmed the circuit court's ruling. In Commerce & Industry, we began our analysis with the well-established rule that the obligation to defend under [the] policy... is broader than the duty to pay claims and arises wherever there is the mere potential for coverage. 73 Haw. at 326, 832 P.2d at 735 (citations omitted). HRCP Rule 54(b) provides that [i]n the absence of [certification] any order ... which adjudicates fewer than all the claims ... shall not terminate the action ... and the order ... is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties. Therefore, we held that HRCP Rule 54(b) makes absolutely clear the tentative nature of a dismissal of a claim prior to issuance of a judgment as to all claims or parties. An insurer has a duty to proceed in defense of a suit to the point of establishing that liability upon which the plaintiff is relying is in fact not covered by the policy, and not merely that it might not be. The duty to defend continues until the potential for liability is finally resolved, which in this case would require [Commerce & Industry] to remain obligated to defend until either HRCP Rule 54(b) certification was granted and the appeal period had expired or a final judgment had disposed of the entire case. Id. at 329, 832 P.2d at 737. The issue presented by the instant case, which was not before us in Commerce & Industry, is whether the potential for liability is finally resolved upon entry of judgment by the circuit court, or whether the insurer's duty to defend requires the insurer to pay for the costs of an appeal of the decision. After surveying decisions from other jurisdictions, it appears that the general rule is that the insurer must provide ... a meaningful defense at the trial level and owes a duty to appeal in all instances where it appears the substantial interests of the insured may be served. The insurer must give weight to the opinions of attorneys employed to defend the case for the insured as well as to those of the attorneys employed by the insured. 7C Appleman, Insurance Law and Practice § 4688 (1979) (footnotes omitted). The insurer has a duty to appeal only if reasonable grounds for an appeal exist. See Cathay Mortuary v. United Pacific Ins. Co., 582 F.Supp. 650 (N.D.Cal.1984); Truck Ins. Exchange v. Century Indem., 76 Wash.App. 527, 887 P.2d 455 (1995); Illinois Founders Ins. Co. v. Guidish, 248 Ill.App.3d 116, 187 Ill.Dec. 845, 618 N.E.2d 436 (1993); Jenkins v. Ins. Co. of North America, 220 Cal.App.3d 1481, 272 Cal.Rptr. 7 (1990); Reichert v. Continental Ins. Co., 290 So.2d 730 (La.App. 1974). Cf. Palmer v. Pacific Indemnity Co., 74 Mich.App. 259, 254 N.W.2d 52 (1977) (holding that the insurance company must always appeal upon request by the insured). In the underlying action in Jenkins, the insurer defended under a reservation of rights based upon the fact that the alleged damages exceeded the policy limits. Upon entry of a verdict against the insured in excess of the policy limits, the insurer was informed by its counsel that there were grounds for appeal. Instead of prosecuting an appeal, the insurer deposited the policy limits with the court and withdrew its defense. In affirming a judgment against the insurer for bad faith, the court held that: An insurer's duty to defend exists independently of and is much broader than the duty to indemnify. It is a duty which continues until a judgment has been entered and has become final.... We conclude this duty to defend may include the duty to appeal where reasonable grounds for an appeal exist.... As to the indemnity judgment against Jenkins, [insurer's] own counsel believed the ruling to be in error and subject to appeal. [insurer's] refusal to follow its attorneys' advice left Jenkins to personally finance his appeal, and is indicative of bad faith.... There is no indication [insurer] evaluated the legal basis for an appeal. Id. at 11-12, 220 Cal.App.3d 1481 (citations omitted). We hold, as a general proposition, that the insurer's duty to defend includes a duty to appeal where reasonable grounds for an appeal exist. State Farm's policies in the instant case contain broad language, informing the insured that it will provide a defense to the insured. [T]he duty to appeal is not precluded by contract unless the contract very specifically exempts the insurer from the duty to appeal. Cathay Mortuary, 582 F.Supp. at 655-56 (citations omitted). Because State Farm's contract did not specifically exclude the duty to defend on appeal, State Farm was obligated to pursue an appeal if reasonable grounds existed. Watanabe presented State Farm with an opinion letter stating that there were no reasonable grounds for an appeal. Dubin, independent counsel hired by the Delmontes, wrote to both Watanabe and State Farm outlining what he perceived as reasonable grounds for appeal. State Farm was required to consider both opinions, utilizing its own counsel if necessary. We note also that Watanabe's opinion letter was drafted after receiving specific instructions from State Farm not to conduct any research. While Watanabe was under an ethical duty to engage in competent representation of the Delmontes, State Farm's apparent reluctance to underwrite necessary expenses put the law firm in a difficult position. Under most circumstances, State Farm's direction to Watanabe not to conduct any research would expose it to potential liability for bad faith. However, for the reasons that follow, in this case State Farm did not breach its duty to defend by not prosecuting an appeal. The circuit court's judgment herein granted summary judgment on State Farm's counterclaim for declaratory relief that it did not have a duty to defend the Delmontes in the underlying action. This counterclaim sought a binding declaration by the Court that State Farm has no obligation under the Policies to defend and/or indemnify [the Delmontes] with respect to any claims asserted against the Delmontes in the underlying action. The judgment of the circuit court entered on February 3, 1998 entered judgment in favor of State Farm as to all claims asserted in State Farm's Counterclaims. The Delmontes did not raise as a point of error on appeal the circuit court's judgment that State Farm did not have a duty to defend the underlying case. Therefore, this judgment is final. Because State Farm did not have a duty to defend the underlying action, it had no duty to appeal. See Illinois Founders, holding that: In our view, the obligation of good faith and fair dealing requires the insurer to prosecute an appeal in circumstances where reasonable grounds are present. We therefore conclude that, when an insurance contract provides a general duty to defend, the question of whether the insurer is obligated to prosecute an appeal from a judgment adverse to an insured must be resolved in the context of the duty of good faith and fair dealing owed by the insurer to its insured. We need not reach the issue of whether such circumstances were present in this case. If [insurer] owed no duty to defend [insured] in the first instance, it clearly had no duty to appeal a judgment against him. 187 Ill.Dec. 845, 618 N.E.2d at 441 (citation omitted)(emphasis added). We hold that, although State Farm may have had a duty to appeal the circuit court's decision, because the final judgment entered in the instant case declared that State Farm did not have a duty to defend the underlying action, and no error was alleged by the Delmontes regarding this conclusion, any cause of action for breach of the duty to appeal is foreclosed. Therefore, the circuit court did not err in ruling that State Farm had no duty to appeal the judgment of the circuit court or to pay the premium for a bond for the appeal.