Court Opinion

ID: 5166175
Source: CourtListenerOpinion
Date Created: 2022-01-02 03:36:50.922358+00
Date Added: 2024-06-11T08:25:51.823123
License: Public Domain

Justice LOHR
dissenting:
The majority affirms the judgment of the Colorado Court of Appeals, which set aside an award of attorney fees incurred in an action by an insured against her insurer for bad faith breach of an insurance contract. Maj. op. at 1286; see Bernhard v. Farmers Ins. Exch., 885 P.2d 265 (Colo.App.1994). The majority holds that no exception to the American rule regarding attorney fees exists in a bad faith breach of insurance contract action and therefore holds that an award of attorney fees is impermissible in the instant case. Maj. op. at 1286. The majority rejects Bernhard’s claim for attorney fees on two bases. First, the majority recognizes that a quasi-fiduciary relationship exists between an insurer and an insured when defending against a third party claim but holds that the duty of an insurer is not sufficiently similar to that of a true fiduciary to warrant including the insurer-insured relationship within the breach of fiduciary duty exception to the American rule. Maj. op. 1289-1290. Secondly, the majority rejects Bernhard’s contention that the insurer’s implied covenant of good faith and fair dealing is a benefit of her insurance contract and that attorney fees incurred to obtain such benefit are recoverable pursuant to Farmers Group, Inc. v. Trimble, 768 P.2d 1243 (Colo.App.1988) {Trimble III), and Brandt v. Superior Court, 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796, 797 (1985). Maj. op. at 1290. Because I would hold that the insurer’s duty arising from the quasi-fiduciary relationship of the insurer to the insured in defending against a third party claim is sufficiently analogous to the duty of a true fiduciary to trigger the fiduciary duty exception to the American rule regarding attorney fees and because I would hold that attorney fees incurred by the insured to obtain the benefit of the insurer’s implied covenant of good faith and fair deal*1292ing are recoverable under Trimble III and Brandt, I respectfully dissent.
I.
I will briefly set forth the facts of this case.1 This is an action by Sandra Bernhard against her insurer, Farmers Insurance Exchange (Farmers), for a bad faith breach of insurance contract. Pursuant to Bernhard’s policy, Farmer’s had “the right and duty to defend, at its own expense, any suit against the insured seeking damages on account of ... bodily injury [to any person] or property damage.... ” The policy also provided that Farmers “may make such investigation and settlement of any claim or suit as it deems expedient, but shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of liability has been exhausted by payment or judgments or settlements.”
After an accident in which Bernhard was responsible for injuring two persons, Farmers provided Bernhard with an attorney to defend her against the claims of the injured persons. The claimants made two separate time-limited offers to settle their claims against Bernhard. The first offer was within the applicable policy limits, and the second was for $30,000 more than the policy limits. After a jury trial, the jury awarded the injured persons amounts substantially in excess of the policy limits, resulting in an excess judgment against Bernhard.
Subsequently, Bernhard agreed with the injured persons to pursue a bad faith claim against Farmers, seeking the amount of the excess judgment as damages. If Bernhard were to recover, the injured persons would receive the portion of the recovery necessary to satisfy the excess judgment and Bernhard would keep any of the recovery above that amount.
After the trial on the bad faith breach claim, Bernhard received an award that included attorney fees. Bernhard agreed with Farmers that the jury’s verdict could not include attorney fees and sought a court order awarding such fees. After a hearing, the trial court awarded Bernhard $32,000 for attorney fees incurred in pursuing her bad faith claim against Fanners. The court of appeals reversed, and we granted certiorari. The majority now affirms the court of appeals.
II.
We follow the American rule, which recognizes that in the absence of a statute, court rule, or private contract to the contrary, attorney fees generally are not recoverable by the prevailing party in either a contract or tort action. Bunnett v. Smallwood, 793 P.2d 157, 160, 162 (Colo.1990); see Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247, 95 S.Ct. 1612, 1616, 44 L.Ed.2d 141 (1975). Colorado has recognized various exceptions to the American rule allowing the recovery of attorney fees.2 As I will discuss below, I believe additional exceptions are found in the Trimble line of cases, and that those exceptions are applicable here. See Farmers Group, Inc. v. Trimble, 658 P.2d 1370 (Colo.App.1982) (Trimble I); Farmers Group, Inc. v. Trimble, 691 P.2d 1138 (Colo. 1984) (Trimble II); Farmers Group, Inc. v. Trimble, 768 P.2d 1243 (Colo.App.1988) {Trimble III).
A.
The Trimble line of cases involved a third party personal injury action against the insured, Trimble. The insurance company, Farmer’s Group, Inc., provided legal counsel to defend Trimble in the third party suit but subsequently filed a declaratory judgment action against Trimble to determine whether Trimble’s policy covered one of the claims. Trimble I, 658 P.2d at 1373. Trimble retained independent counsel and counterclaimed against the insurer for damages, alleging bad faith breach of insurance contract, among other claims, based on misconduct in the manner in which the insurer handled the third party claim. The district court dismissed each of the counterclaims for failure *1293to state a claim. The court of appeals reversed dismissal of certain of the counterclaims, including the counterclaim for bad faith breach of insurance contract. We granted certiorari “to consider whether evidence of intentional conduct is necessary to establish the tort of bad faith breach of an insurance contract.” Trimble II, 691 P.2d at 1139. We concluded that “the standard of conduct of an insurer in relation to its insured in a third party context must be characterized by general principles of negligence.” Id. at 1142. We held that tested by the appropriate standard, the counterclaim adequately stated a claim on which relief could be granted. Id. at 1142-43. We therefore affirmed the part of the court of appeals’ judgment reversing dismissal of the bad faith breach claim.
In arriving at our decision in Trimble II, we held that “[t]he standard of conduct on the part of the insurer when dealing with claims arising under an insurance policy is shaped by, and must reflect, the quasi-fiduciary relationship that exists between the insurer and the insured by virtue of the insurance contract.” Id. at 1141. We stated: “Particularly when handling claims of third persons that are brought against the insured, an insurance company stands in a position similar to that of a fiduciary.” Id. We reasoned that this is so because under the insurance contract, “the insurer retains the absolute right to control the defense of actions brought against the insured, and the insured is therefore precluded from interfering with the investigation and negotiation for settlement.” Id.
The issue now before us is whether an insured can recover attorney fees incurred in successfully pursuing a bad faith breach of insurance contract claim against an insurer. As the majority recognizes, attorney fees may be awarded to a successful plaintiff in an action for breach of fiduciary duty, as an exception to the American rule. Buder v. Sartore, 774 P.2d 1383 (Colo.1989); Heller v. First Nat’l Bank, N.A., 657 P.2d 992 (Colo.App.1982); see maj. op. at 1288-1289. The majority, however, concludes that the quasi-fiduciary duty of an insurer to its insured and the duty of a true fiduciary to its beneficiary are significantly different and consequently breach of the quasi-fiduciary duty does not qualify for the breach of fiduciary duty exception to the American rule regarding the recovery of attorney fees. See maj. op. at 1289-1290. I would hold to the contrary and would allow recovery of attorney fees incurred by an insured in successfully maintaining a bad faith breach of contract claim against the insurer.
The majority asserts that the insurer lacks any control over many aspects of its relationship with the insured and therefore the majority “refrain[s] from characterizing the insurer/insured relationship as quasi-fiduciary for all purposes.” Maj. op. at 1289. This statement creates confusion regarding the nature of the quasi-fiduciary relationship and I believe misconstrues the term as intended by this Court in Trimble II. The relevant context for consideration of the relationship of insurer and insured for purposes of the present ease is the defense of third party claims against the insured. In this context, the analogy of the relationship of insurer and insured to a fiduciary relationship is at its strongest. This is because of the degree of control ceded to the insurer by the insured pursuant to the insurance contract in conducting such defense. The fact that in other aspects of their relationship the insurer may have no such duty to its insured is not relevant for the purpose of the present case.
In refusing to recognize an analogy to a fiduciary relationship, the majority determines that the relationship between the insurer and the insured is simply a contractual relationship. See Maj. op. at 1289. However, I believe two important distinctions exist in this type of contractual relationship. First, we have recognized the disparity of control between the contracting parties in the insurance contract as contrasted with that existing in other contractual relationships. Trimble II, 691 P.2d at 1141. Second, a consumer’s expectation in entering into an insurance contract is to be freed from liability and to obtain security from economic catastrophe. See Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 571 (1986). Therefore, although the relationship is founded in contract, a quasi-fiduciary relationship arises *1294because of the unique characteristics of the mutual obligations and expectations of the parties.
In Rawlings v. Apodaca, the court determined that an insurer violates the covenant of good faith and fair dealing when, for the purpose of protecting its own interests, it does not act with equal consideration, fairness and honesty to avoid depriving the insured “of the very security for which he bargained or expos[ing] him to the catastrophe from which he sought intervention.” Id., 726 P.2d at 571. In so holding, the court in Rawlings determined that although the insurer is not a fiduciary, the insurer does have some duties of a fiduciary nature. Id.3 In the present case the duties of the insurer to defend Bernhard against the third party claims were quasi-fiduciary. I disagree with the majority’s conclusion that the quasi-fiduciary duty of an insurer in this context and the duty of a true fiduciary are so significantly different that the exception regarding the recovery of attorney fees should not apply. Maj. op. at 1289.
In the context in which the quasi-fiduciary duty applies, the insurer must act in good faith and take the interests of the insured into account in its conduct of the defense and of settlement negotiations. See Trimble II, 691 P.2d at 1141. This is only a natural and fair consequence of the terms of the insurance contract, where the insured relinquishes control of the defense of third party claims and the insurer assumes responsibility for the defense.
Because a breach of a fiduciary duty is a recognized exception to the American rule, I likewise would include breach of the heightened duty associated with the quasi-fiduciary relationship of an insurance contract as an exception to the American rule that generally bars the recovery of attorney fees in a contract or tort action.
B.
The majority opinion disagrees with Bern-hard’s assertion that good faith and fair dealing is a benefit of her insurance contract and that the language in Trimble III allows recovery of attorney fees whenever an insured reasonably hires an attorney to obtain the benefits of such contract. Maj. op. at 1290.
Trimble III was an appeal by the insurer following a verdict for Trimble on his claim for bad faith breach of insurance contract following our remand in Trimble II. The court of appeals recognized that the damages for emotional distress at issue on appeal could be awarded only if sufficient economic loss was also established. The court held that the attorney fees incurred by the insured “to obtain the benefits tortiously denied by his insurer ... constitute economic loss caused by the tort and are recoverable as damages.” Trimble III, 768 P.2d at 1246. In so holding, the court of appeals relied upon Brandt v. Superior Court, 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796 (1985).
Brandt involved an action by an employee who was a beneficiary of a group disability policy provided by his employer. The employee became totally disabled, but the insurance carrier refused to pay any benefits. The employee filed a complaint, alleging both a contract claim, seeking to be paid the benefits due under the policy, and a tort claim, seeking additional damages based upon the insurer’s breach of the covenant of good faith and fair dealing. The court in Brandt held *1295that an insured is entitled to recover attorney fees in an action to obtain benefits under the policy, including attorney fees when the insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy. Id., 210 CaLRptr. at 212, 693 P.2d at 798. The court reasoned that “[w]hen an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense.” Id. The court in Brandt allowed recovery of attorney fees as damages proximately caused by the tort. Id.
Similarly, in Trimble III, the court of appeals determined that attorney fees are proper damages where the insured “is reasonably compelled to hire an attorney to obtain benefits tortiously denied by his insurer” because these fees “constitute economic loss caused by the tort and are recoverable as damages.” Trimble III, 768 P.2d at 1246. Trimble III stated this principle of law relying on Brandt without any limitations as the majority here now wishes to establish. Nowhere did either Tñmble III or Brandt limit the recovery of attorney fees to securing benefits explicitly listed in the contract. Farmer’s tortious conduct compelled Bernhard to hire an attorney to obtain the benefit of the implied covenant of good faith and fair dealing. According to the explicit language in Brandt, relied upon and restated in Trimble III, Bernhard is entitled to recover her attorney fees.
III.
For the foregoing reasons I respectfully dissent and would reverse that part of the judgment of the Colorado Court of Appeals that reversed the trial court’s award of attorney fees for the bad faith breach of the insurance contract.

. The majority opinion has a more lengthy rendition of the facts. See maj. op. at 1286-1287.

. A listing of some exceptions to the American rule recognized in Colorado is set forth in the majority opinion. Maj. op. at 1287 n. 3.

. In dicta, various courts have recognized the existence of a fiduciary relationship between the insurer and the insured under the provisions of the policy that impose upon the insurer the obligation of exercising good faith in negotiating for and effecting a settlement of a claim against its insured. See Baxter v. Royal Indem. Co., 285 So.2d 652, 655-56 (Fla.Dist.Ct.App.l973)(hold-ing that a fiduciary duty exists pursuant to bodily injury provision to effect a settlement in good faith and protect from excess judgment but no such duty exists with respect to claims made against it pursuant to uninsured motorist provision under which the insured was suing.), cert. discharged, 317 So.2d 725 (Fla.1975). In Craft v. Economy Fire & Cas. Co., 572 F.2d 565 (7th Cir.1978), the court, in dicta, recognized the fiduciary duty pursuant to third party liability coverage. The court stated:
[W]hen the insured is sued by a third party, the insurance company takes over the defense of the suit and the insured cannot settle the matter without the permission of the insurer. It is this control of the litigation by. the insurer coupled with differing levels of exposure to economic loss which gives rise to the 'fiduciary’ nature of the insurer's duty.
Id. at 569.