Opinion ID: 1365750
Heading Depth: 2
Heading Rank: 2

Heading: consequences of the wrongful failure to defend

Text: When an insurer breaches the insurance contract by wrongfully refusing to defend its insured, the insurer will always be liable for the reasonable costs and attorney's fees subsequently incurred by the insured in the defense of the claim. Marwell Construction, Inc. v. Underwriters at Lloyd's London, 465 P.2d 298, 307 (Alaska 1970). See also Annot., 49 A.L.R.2d 694, 721-36 (1956). The insurer will also be liable for attorney's fees incurred by the insured in settling the claim. 7A J. Appleman, Insurance Law and Practice § 4691, at 505 (1962) & at 355 (Cum.Supp. 1974). In Theodore v. Zurich General Accident & Liability Insurance Co., 364 P.2d 51 (Alaska 1961), we held that, where an insurance company wrongfully refused to defend, it was liable for the full amount of the settlement reached by the insured. [5] We held that, in a subsequent suit on the policy, the company had no right to claim that the liability was not covered by the policy. This holding, however, has been limited somewhat by our decision in Marwell Construction Co. v. Underwriters at Lloyd's, London, 465 P.2d 298 (Alaska 1970). In Marwell we recognized the right of the insurance company under certain circumstances to contest coverage in a subsequent action on the policy: Even when the parties to a present action are identical to the parties to an earlier action, the decree in the earlier action will not be binding if the decree could have been rendered on two or more grounds but there is nothing in fact or in the record to show which ground was the basis of the decree. Id. at 307-08. The position taken in Marwell was implicitly reiterated in Continental Insurance Co. v. United States Fidelity & Guaranty Co., 528 P.2d 420 (Alaska 1974): The insurer who wrongfully fails to defend will ... be precluded from relitigating any issues necessarily determined in the primary action, and will be required to indemnify at least to policy limits any liability imposed upon the insured in that action based upon theories within the coverage of the relevant policy. Id. at 435 n. 16 (emphasis added), citing Hogan v. Midland-National Insurance Co., 3 Cal.3d 553, 91 Cal. Rptr. 153, 476 P.2d 825, 832 (Cal. 1970). Where, as here, a settlement is reached in a suit which alleged several grounds for relief, some within policy coverage and some not, the liability imposed by the settlement agreement is not necessarily within the coverage of the policy. Since the basis for liability in such a situation has not been necessarily determined, we believe the insurance company should be permitted to contest coverage. We therefore hold that, where an insurance company has wrongfully refused to defend, it may nevertheless in a subsequent action on the policy attempt to show that the liability is not covered by the policy, where liability is imposed by a settlement agreement in a case involving both claims within policy coverage and claims not within policy coverage. If such liability is subsequently found to be covered by the policy, the insurer may then be held liable, at least up to the policy limits, for the full amount of any obligation reasonably incurred by the insured in the settlement. If, however, the liability of the insured is found not to be within the coverage of the policy, the insurer is not liable for obligations incurred by the insured in a settlement, even though the settlement is reasonable. See generally R. Keeton, Basic Text on Insurance Law § 7.6(e), at 487-88 (1971); Comment, The Insurer's Duty to Defend Under a Liability Insurance Policy, 114 U.Pa.L.Rev. 734, 739-45 (1966). In the case at bar, the Afcans' amended complaint in the original suit against Barclay stated both claims covered by the policy and claims not covered by the policy. No judgment was obtained in the initial proceeding; the case was settled out of court. In achieving this settlement Barclay necessarily incurred attorney's fees, and he assumed an obligation to pay $60,000 to the Afcans. Also as part of the settlement, Barclay assigned to the Afcans whatever rights he had against Mutual Fire. Barclay clearly had the right to recover from Mutual Fire the reasonable costs and attorney's fees incurred in the defense and settlement of the claim. That, however, is the only right that Barclay had against Mutual Fire. In its well-reasoned decision on the parties' cross-motions for summary judgment, the trial court found, on the basis of undisputed facts, that the insurance policy did not provide errors and omissions coverage for trustees and that Barclay, in the transactions complained of, acted solely as a trustee. Since any liability was determined to be outside the coverage of the policy, Barclay had no right to indemnification from Mutual Fire. [6] Since the Afcans' rights against Mutual Fire are co-extensive with those of Barclay, on remand the court should award to the Afcans the costs and attorney's fees for which Mutual Fire would have been liable to Barclay. Since they are now the prevailing parties, the Afcans presumably will also be entitled under Civil Rule 82 to an award of attorney's fees which they have incurred in this action. REVERSED and REMANDED.