The insuring agreement of the typical CGL policy states that the insurer has the right and the duty to defend any "suit seeking" damages to which the insurance applies. The policy also states that
Our right and duty to defend end when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C.
The text is typically silent on whether the insurer has a duty to prosecute an appeal on behalf of its insured. Although Texas law is silent on this point, a number of jurisdictions that have addressed the issue have held that an insurer has a duty to continue the defense of its insured under two circumstances:
- if there are reasonable grounds to believe that a judgment in excess of policy limits might be reversed or materially reduced, or
- if there are reasonable grounds to believe a judgment entered in a non-covered area might be reversed. Allan D. Windt, Insurance Claims and Disputes § 4.17 (4th ed. 2003).
The courts that have held that an insurer has a duty to prosecute appeals have offered several rationales. The first is that there is typically nothing in the policy language that explicitly restricts the defense obligation to pre-trial and trial matters, and any ambiguity in the policy must be construed against the insurer. See, e.g., Palmer v. Pacific Indem. Co., 254 N.W.2d 52, 55 (Mich. App. 1977); Kaste v. Hartford Acc. & Indem. Co., 170 N.Y.S.2d 614, 617-18 (N.Y. App. Div. 1958) (Frank, J., concurring).
Another justification is that the insurer is generally in control of the defense and cannot surrender control when the insured may need the most help. See, e.g., Reichert v. Continental Ins. Co., 290 So.2d 730, 734 (La. App. 1974) (affirming a duty to prosecute appeal: "mere resistance of claims against the insured at trial level may not be sufficient in all instances").
Another rationale offered is that the duty to defend continues until it can be concluded as a matter of law that there is no basis on which the insurer may be obligated to indemnify the insured. Thus, even if a trial court ruling in the underlying case would exclude coverage, the duty to defend continues as long as that ruling can be reversed. Cf. Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 416 (Minn. 1997) (holding that duty to defend continued even after covered claims were dismissed by trial court on pre-trial motion because there was no final judgment).
Aside from Michigan, however, no courts have held that an insurer always has a duty to prosecute an appeal for its insured when the insured so requests. In Palmer, the Michigan Court of Appeals stated that the decision as to whether there was a duty to defend should not hinge on whether the insurer thought there was a reasonable basis for an appeal. The primary reason is that the insured may not be able to spend thousands of dollars on an appeal to prove that the insurer's judgment was wrong. A second reason is to avoid collateral coverage litigation after an unsuccessful appeal as to whether or not an appeal was reasonable. Palmer, 254 N.W.2d at 55.
The Palmer rule was criticized by the Illinois Court of Appeals in Illinois Founders Ins. Co. v. Guidish, 618 N.E.2d 436 (Ill. App. 1993). That court observed that such a rule might, under some circumstances, require the insurer to file a frivolous appeal to avoid a charge that it breached its duty to defend. Id. at 441.
A third line of cases suggests that an insurer is liable for its failure to prosecute an appeal for its insured only if that decision was motivated by bad faith. Hawkeye Security Ins. Co. v. Indemnity Ins. Co., 260 F.2d 361, 364 (10th Cir. 1961); Koppie v. Allied Mut. Ins. Co., 210 N.W.2d 844, 847 (Iowa 1973). However, one commentator has noted that this test leads to a similar outcome - if there were reasonable grounds for prosecuting an appeal, but the insurer failed to do so, then the insurer acted unreasonably and violated its duty of good faith and fair dealing to the insured. Allan D. Windt, Insurance Claims and Disputes § 4.17 (4th ed. 2003); see also Guidish, 618 N.E.2d at 441 ("The obligation of good faith and fair dealing requires the insurer to prosecute an appeal in circumstances where reasonable grounds are present").
In determining whether reasonable grounds existed to prosecute an appeal, the opinion of the underlying defense counsel is highly relevant. In Reichert, the court held that the insurer had breached its duty to prosecute an appeal. The court relied upon the opinion of defense counsel, who recommended to the insurer that the insured had strong grounds for appeal because the amount of damages awarded by the trial court was excessive. Reichert, 290 So.2d at 734. The court also held that the fact that the appeal was ultimately unsuccessful was not relevant - the issue was whether reasonable grounds for an appeal existed at the time of trial. Id.
The Washington Court of Appeals likewise held that, because of the fiduciary relationship between insurer and insured, the duty to defend included the duty to seek postjudgment relief where reasonable grounds existed to support such relief. Truck Ins. Exch. v. Century Indem. Co., 887 P.2d 455, 459 (Wash. App. 1995). In that case, the summary judgment in favor of the primary insurer was reversed, and the matter remanded, because of a genuine issue of material fact as to whether reasonable grounds existed for appeal. Specifically, defense counsel believed that there were "fertile grounds" for appeal of the underlying verdict, while the primary insurer's claims handler believed that there was no reasonable basis for appeal. Truck, 887 P.2d at 449.
In Jenkins v. Insurance Co. of North America, 272 Cal. Rptr. 7 (Cal. App. 1990), the Court affirmed a trial court verdict that INA acted in bad faith by failing to prosecute an appeal on behalf of its insured. In Jenkins, the insured, a homebuilder, was sued by six homeowners who received two verdicts worth $761,000, in excess of INA's primary limits. INA tendered its policy limits to the court by way of interpleader and refused to defend the insured on appeal, even though defense counsel recommended that several grounds for appeal existed. Jenkins, 272 Cal. Rptr. at 10. The insured instead financed his own successful appeal. The insured then sued INA for breach of the duty of good faith and fair dealing. A jury awarded the insured $500,000 in actual damages and $2,500,000 in punitive damages. Id. at 8. INA appealed.
The Court of Appeals affirmed the award. The Court held that INA had a duty to prosecute the appeal. For purposes of the bad faith award, the Court also held that there was sufficient evidence to support the jury's finding that INA "never evaluated or considered the propriety or legal basis for an appeal of either of the judgments." Id. at 12-13. The Court added that the trial court's instruction properly placed the burden of proof on the insured to show that INA had refused to appeal where there were reasonable grounds for appeal. Id. at 13.
Covered and Uncovered Claims
In some cases the insured may seek to reverse a judgment or finding that, if final, would preclude coverage. Courts in these cases will subject any decision by the insurer to not prosecute an appeal to heightened scrutiny. For example, in Iacobelli Constr. Co. v. Western Cas. & Sur. Co., 343 N.W.2d 517 (Mich. App. 1983), the insured (Iacobelli) was sued for trespass. The insurer defended Iacobelli under a reservation of rights, noting that there would be no coverage if the trespass were deemed to be an intentional act. Iacobelli, 343 N.W.2d at 259. The case went to trial, and the judgment found that the trespass had been intentional.
Iacobelli asked the insurer to appeal, claiming that the jury instructions were flawed because they did not include negligent trespass. The insurer refused, citing the intentional act finding, and Iacobelli filed its own appeal and brought a declaratory judgment action against the insurer. Id. at 260. Iacobelli's appeal on the underlying case was unsuccessful, but the trial court in the coverage action held that the insurer had both a duty to indemnify Iacobelli and to reimburse it for its defense costs on appeal. Id.
The insurer appealed. The Court of Appeals held that the insurer had no duty to indemnify Iacobelli for the trespass because of the application of the intentional act exclusion. Id. at 264. However, the court affirmed the trial court judgment that the insurer had breached its duty to defend, even though the insured's appeal was unsuccessful.
To allow the insurer to determine when there is no coverage is to place a great burden on the insured. This is especially true where, as here, plaintiff appealed, claiming as error that the jury was not afforded the opportunity to pass on the issue of whether the trespass was merely negligent. If Plaintiff's claim had ultimately been vindicated on appeal, there would have been coverage. Id. at 266. Cf. Guarantee Abstract and Title Co. v. Interstate Fire and Cas. Co., 618 P.2d 1195, 1200 (Kan. 1980) (holding that although insurer had no duty to indemnify insured for punitive damages awarded in underlying case, insurer breached duty to prosecute appeal for insured where appeal reduced punitive damages award by 50%).
In one case, the breach of the duty to appeal created coverage where it probably did not exist. In Cathay Mortuary v. United Pacific Ins. Co., 582 F.Supp. 650 (N.D. Cal. 1984), a funeral home was sued after a family alleged that it had negligently and/or intentionally taken a family member's body from the coroner's office without permission. The insurer, United Pacific, defended under a reservation of rights, noting that there was no coverage for intentional acts. Cathay Mortuary, 582 F.Supp. at 652. The case went to trial, and the jury awarded $15,000 to the plaintiffs for the funeral home's negligence and $45,000 because a funeral home employee intentionally removed the body without permission. Id.
United Pacific instructed trial counsel not to file a motion for new trial or notice of appeal, and refused to post an appeal bond. It then tendered $15,000 to the plaintiffs to settle the jury award for the funeral home's negligence. The funeral home then filed its own motion for new trial, which was denied. The funeral home then settled with the plaintiffs for $35,000 and sued United Pacific to recover the costs of the settlement and defense costs incurred in connection with the motion for new trial. Id. at 653.
The parties moved for summary judgment on the defense and indemnity issues. The court found that the funeral home had strong grounds for appeal in the underlying case because the judge failed to instruct the jury that a corporation could only commit an intentional act if the corporation directs or ratifies the act. Id. at 654. The court observed that United Pacific had a strong incentive not to appeal the verdict because most of the liability was allocated to intentional losses not covered under the policy. Id. at 657-58. The court held that in such a situation, the interest of the insurer must yield to the interest of the insured. Id. at 659. Therefore, United Pacific had a duty to pursue post-trial remedies, including appeal. Because United Pacific breached its duty to appeal, the Court held it liable for all the consequences of the breach, including the $35,000 settlement of the intentional act claims, which the court deemed reasonable, and the funeral home's post-trial defense costs. Id. at 659-60.
Rights of Excess Carriers
An excess carrier may have a subrogation action against a primary carrier if it wrongfully refuses to prosecute an appeal for its insured. In Aetna Ins. Co. v. Borrell-Bigby Elec. Co., 541 So.2d 139 (Fla. App. 1989), the insured (Borrell-Bigby) was sued after a fire alarm it installed in a warehouse caused a fire that destroyed the warehouse. A company that stored product in the warehouse sued Borrell-Bigby for the value of its lost product. Aetna defended Borrell-Bigby through trial, which resulted in a judgment in excess of the primary limits. Borrell-Bigby, 541 So.2d at 140. Defense counsel recommended appeal, and Borrell-Bigby demanded an appeal, but Aetna tendered its limits via interpleader and refused to defend Borrell-Bigby in that case or other cases arising out of that occurrence. Borrell-Bigby's excess insurer, Holland-America, then assumed defense on appeal. Borrell-Bigby and Holland-America then filed a declaratory judgment action against Aetna, seeking to recover defense costs incurred on appeal and in the other actions. Id.
While the declaratory judgment action was pending, the Florida Court of Appeals reversed the underlying judgment and rendered for Borrell-Bigby. The trial court in the coverage matter then granted Borrell-Bigby and Holland-America's summary judgment against Aetna. Id. Aetna appealed. The Florida Court of Appeals first held that Aetna could not renounce its defense obligations by tendering the limits to the court. "The insurer cannot truncate its defense obligations by leaping to pay a questionable judgment or claim, as Aetna attempted to do here; it must first in good faith establish the validity of such a judgment before paying out its limits and ceasing to defend." Id. at 141.
The Court then held that an insurer has a duty to appeal an adverse judgment against its insured where good faith grounds exist for doing so, and that Aetna had such a duty in this case, where defense counsel recommended that an appeal be taken. The court then added that Holland-America was entitled to recover its defense costs from Aetna, because Holland-America assumed the rights and obligations of the insured vis-à-vis the primary carrier. Id; see also Fidelity Gen. Ins. Co. v. Aetna Ins Co., 278 N.Y.S.2d 787 (N.Y. App. 1967) (holding excess insurer entitled to reimbursement as equitable subrogee of insured for reasonable attorneys' fees incurred in prosecuting appeal).
Trial of the case may not mean that the insurer's duty to defend is complete. An insurer must be proactive in reviewing the record to decide whether reasonable grounds exist for taking an appeal, so that if the insurer decides not to appeal, there is solid evidence to justify that decision. Where the decision to appeal may create a potential conflict of interest between the insured and the insurer, the insurer should seek the advice of outside coverage counsel in making such a decision.