Bernhard v. Farmers Insurance Exchange

915 P.2d 1285, 20 Brief Times Rptr. 612, 1996 Colo. LEXIS 165, 1996 WL 189803

• Court: Supreme Court of Colorado
• Decided: April 22, 1996
• Docket: No. 94SC376
• Status: Published

Opinions

Justice KOURLIS

delivered the Opinion of the Court.

We granted certiorari to review the court of appeals opinion in Bernhard, v. Farmers Insurance Exchange, 885 P.2d 265 (Colo. App.1994), which set aside an award of attorney fees incurred in an action by an insured against her insurer for bad faith breach of insurance contract. We recognize no exception to the American rule on attorney fees that would allow an award of attorney fees in a bad faith breach of insurance contract action and accordingly affirm the judgment of the court of appeals.

I.

This is an action by the insured, Sandra Bernhard, against her automobile liability insurer, Farmers Insurance Exchange (“Farmers”), for bad faith breach of insurance contract. Bernhard’s automobile insurance policy provided bodily injury liability protection in the amount of $100,000 per person and $300,000 per accident. The policy also gave Farmers “the right and duty to defend, at its own expense, any suit against the insured seeking damages on account of such bodily injury or property damage....” The policy further read: “The Company 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.”

On December 5, 1986, Bernhard drove through a stop sign and struck a car, seriously injuring the two occupants, John and Lucille Olivas. Bernhard, who had consumed several alcoholic drinks before driving home from her job as a waitress at the Flatirons Country Club, was found to be legally intoxicated at the time of the accident. The Oli-vases sued Bernhard and the Flatirons Country Club for compensatory and exemplary damages in excess of Bernhard’s $100,000 per person policy limits. As required by the terms of the contract, Farmers provided an attorney to defend Bernhard.¹

On two separate occasions the Olivases made time-limited offers to settle their claims against Bernhard: first for the applicable policy limits of $200,000 and later, for $230,000. Farmers did not accept either of these settlement offers. At trial, the jury found against Bernhard and the Flatirons Country Club and awarded the Olivases damages substantially in excess of the policy limits. John and Lucille Olivas were awarded $407,000 and $163,000 in compensatory damages, respectively, and $5,000 each in exemplary damages. After the Flatirons Country Club paid the amount for which it was liable and Farmers paid the Olivases the $200,000 it owed on Bernhard’s policy, $82,-000 remained owing on the judgment against Bernhard.

Bernhard then entered into an agreement with the Olivases in which Bernhard agreed to pursue a bad faith claim against Farmers seeking the amount of excess judgment as damages. Under this agreement, the Olivas-es would receive the first $82,000 of any recovery and anything above that would go to Bernhard. As long as Bernhard went through all available appeals and exhausted all her remedies, the Olivases agreed not to execute on the $82,000 excess judgment owed to them by Bernhard.

Bernhard brought this suit for bad faith breach of contract against Farmers for its failure to settle with the Olivases, She sought a damage award for the excess judgment of $82,000 and additional damages for emotional distress. The case initially resulted in a hung jury but was retried in July of 1992. The jury did not award Bernhard any damages for emotional distress, but did award her $108,911.30 for the excess judgment and for the attorney fees she had incurred in bringing the bad faith breach of contract case against Farmers.

Farmers moved for a new trial or to amend the judgment, arguing that the jury could not award attorney fees. Bernhard agreed that the jury’s verdict should not have included attorney fees, but filed a separate motion seeking an award of attorney fees from the court. At the hearing, the trial court judge awarded Bernhard $32,000 for attorney fees incurred in the pursuit of her bad faith claim against Farmers. Farmers appealed and the court of appeals reversed the trial court’s award of attorney fees.

We granted certiorari to determine: Whether the court of appeals erred by reversing the trial court’s award of attorney fees upon the petitioner’s successful litigation of a tortious breach of insurance contract claim.

We hold that, unless specifically provided for in the insurance contract, attorney fees are not recoverable upon successful litigation of a bad faith breach of insurance contract claim. We therefore affirm the court of appeals’ reversal of the trial court’s award of attorney fees to Bernhard and remand the case for proceedings consistent with this opinion.

II.

As a general rule, in the absence of a statute, court rule,² or private contract to the contrary, attorney fees are not recoverable by the prevailing party in either a contract or tort action. Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247, 95 S.Ct. 1612, 1616, 44 L.Ed.2d 141 (1975); Bunnett v. Smallwood, 793 P.2d 157, 160 (Colo.1990). This reasoning is based on the American rule, which requires each party in a lawsuit to bear its own legal expenses.

The rationale behind the rule is broad-ranging: for example, responsibility for one’s own legal expenses is thought to promote settlement; poor litigants may be discouraged from instituting actions to vindicate their rights if the penalty for losing were to include paying their opponent’s attorney fees; and the difficulty of ascertaining reasonable attorney fees in every case would pose a substantial burden on judicial administration. See Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 718, 87 S.Ct. 1404, 1407, 18 L.Ed.2d 475 (1967).

Colorado does recognize several exceptions to the general rule,³ however, Bernhard’s claim for attorney fees does not fit within any established exception. Permitting Bernhard to recover attorney fees would represent the creation of a new exception to the American rule: a function better addressed by the legislative than the judicial branch of government.

Bernhard argues that her situation is analogous to that discussed in 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), and Farmers Group, Inc. v. Trimble, 768 P.2d 1243 (Colo.App.1988) (Trimble III), and that since attorney fees were awarded in that line of cases, they should be awarded in her case as well. Bernhard, however, misapplies the Trimble cases.

The Trimble eases were related to a third party personal injury lawsuit brought against the insured, Trimble, based on several claims including one of negligent entrustment. Trimble’s insurer, Farmers Group, Inc., was contractually required to provide for Trim-ble’s legal defense. Farmers Group, Inc., did hire an attorney to defend Trimble. However, while this third party case was ongoing, Farmers Group, Inc., filed a declaratory judgment action against Trimble seeking a determination that Trimble’s policy did not provide coverage for the negligent entrustment claim. As a result, Trimble was unable to discuss the third party proceedings with the attorney retained by Farmers Group, Inc., and because he was facing an imminent deposition in the third party suit, he was forced to retain a private attorney to defend himself. The third party claim against Trim-ble eventually settled out of court. In the meantime, Trimble counterclaimed against the insurer in the declaratory judgment proceeding, seeking reimbursement of the money he had spent on hiring the private attorney.

The court of appeals in Trimble I held that Trimble could recover his costs in hiring an attorney to defend him against the claims brought by the third party. The court reasoned that the fees were recoverable since they were incurred as a direct result of the insurer’s failure to provide him with a legal defense, which was an explicit term of the contract. The court stated that the fees could be “considered damages naturally flowing from the failure of the insurer to exercise reasonable care in representing the insured in the course of litigation.” Trimble I, 658 P.2d at 1374.

This court explained in Bunnett v. Small-wood, 793 P.2d 157, 161 (Colo.1990), that attorney fees are recoverable when they themselves are the subject of the lawsuit, or in other words, when the fees represent a specific benefit of the contract breached by the opposing party. For example, when an attorney brings suit against his or her own client to enforce a fee agreement, the past due attorney fees sought by the attorney are themselves the subject of the lawsuit. In such a situation the fees are not merely incidental to the bringing of the lawsuit but rather are an explicit benefit of the contract breached by the opposing party. Similarly, in Trimble I, Trimble sought reimbursement for the fees that he was forced to incur due to the insurer’s failure to provide counsel. These fees were a specific and direct benefit of the contract breached by the insurer. Thus, they were not incidental to the bringing of the lawsuit but rather were the subject of the action itself.

While the facts show that the award of attorney fees in the Trimble cases fits within an exception to the American rule accepted in Colorado, the language in Trimble II, 691 P.2d 1138, does raise legitimate questions as to the parameters of awarding attorney fees in cases involving bad faith breach of insurance contracts. Those questions deserve to be addressed.

A.

In Trimble II, this court concluded that a quasi-fiduciary relationship exists between an insurer and insured within the context of defense of a third party claim.

Attorney fees may be recoverable in an action for breach of fiduciary duty as a recognized exception to the American rule. In Heller v. First Nat’l Bank, N.A., 657 P.2d 992 (ColoApp.1982), the court of appeals found that, because the standard of conduct required of a trustee is so high, the goal in a breach of trust action is to make the injured party whole, and thus the court has the discretion to award attorney fees if necessary to meet that goal. This court later upheld Heller in Buder v. Sartore, 774 P.2d 1383 (Colo.1989). Buder concerned a breach of fiduciary duty action. This court reasoned that, as in a breach of trust action, the goal in a breach of fiduciary duty action is to make the injured party whole. Hence, the injured party is entitled to recover attorney fees if necessary to restore that party to his or her pre-injury status. Buder, 774 P.2d at 1391.

The question raised here is whether an action based on a breach of a qmsi-fiduciary duty should be analogized to an action based on breach of a fiduciary duty and thus be treated as an exception to the American rule. We find significant and dispositive distinctions between the quasi-fiduciary duty of an insurer and the duty of a true fiduciary, and conclude that the exception does not apply.

In Trimble II we held that the quasi-fiduciary duty of an insurer toward an insured stems specifically from the insurer’s control over the defense of actions brought against the insured by third parties. Trim-ble II, 691 P.2d at 1141. The determination of whether a true fiduciary relationship exists depends upon the degree of control exercised by the fiduciary over the affairs of the other person.⁴ The quasi-fiduciary relationship between an insurer and an insured is limited to areas in which the insurer exercises a strong degree of control over the insured’s interests. Even though the insurer may have control over the defense of a third party lawsuit, the insurer lacks any such control over many other aspects of its relationship with the insured. Thus, we refrain from characterizing the insurer/insured relationship as quasi-fiduciary for all purposes, for doing so would impose duties on the insurer that this court has not endorsed.

Furthermore, even in the context of defending a third party lawsuit, the relationship between an insurer and an insured falls short of a true fiduciary relationship. An insured can regain some control over her defense by retaining independent counsel, either at her own cost and expense or by later suing the insurer for collection of those fees. Trimble II, 691 P.2d at 1141; Trimble I, 658 P.2d at 1374. Also, the extent of the duty required of an insurer in the quasi-fiduciary relationship differs from what would be required in a true fiduciary relationship. One who is acting as a fiduciary for another has the duty to act with the utmost good faith and loyalty on behalf of, and for the benefit of, the other person. See McKinney v. Christmas, 143 Colo. 361, 363, 353 P.2d 373, 374 (1960), Brunner v. Horton, 702 P.2d 283, 284 (Colo.App.1985). The duty required of an insurer towards the insured is much more constrained. In Trimble II, this court held that an insurer’s actions are governed by general principles of negligence and that the quasi-fiduciary relationship between an insurer and its insured requires only reasonable conduct on the part of the insurer, nothing more. Trimble II, 691 P.2d at 1142.

The insurer-insured relationship is a contractual one, created for the mutual benefit of the parties. The insured retains some responsibilities for, and control over, decision-making that distinguish the relationship from one of a true fiduciary nature. To hold otherwise would be to deprive both the insured and the insurer of the mutuality of the contract. Thus, we conclude that the duty of an insurer and that of a true fiduciary are not similar enough to warrant including the quasi-fiduciary duty of the insurer within the breach of fiduciary duty exception to the American rule.

B.

In addition to finding a quasi-fiduciary relationship between the insurer and the insured, Trimble II found an implied covenant of good faith and fair dealing in every insurance contract. Trimble II, 691 P.2d at 1141. It is from this implied covenant of good faith and fair dealing that bad faith breach of insurance contract as a tort cause of action may arise. Id.

Bernhard argues that, based on Trimble II, 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 benefits of the contract. We disagree with both steps of Bernhard’s argument.

First, we disagree with her assertion that good faith and fair dealing is a benefit of the insurance contract. Trimble II imposes a legal duty on an insurer to deal with its insured in good faith. Trimble II, 691 P.2d at 1141. It does not find good faith or fair dealing to be a benefit of the contract itself. Instead, Trimble II creates a tort cause of action based on a bad faith breach of an insurance contract, but it does not give rise to a claim that failure to deal in good faith is a denial of a contract benefit.

We also disagree with Bernhard’s contention that Trimble III allows recovery of attorney fees when any benefit of a contract has been denied. Trimble III holds, in pertinent part, that expenditure of attorneys’ fees in defending a third party tort action could serve as the economic loss from which emotional distress damages resulted. In so holding, the court of appeals states ‘When an insured is reasonably compelled to hire an attorney to obtain benefits tortiously denied by his insurer, the attorney fees so incurred constitute economic loss caused by the tort and are recoverable as damages.” Trimble III, 768 P.2d at 1246 (citing Brandt v. Superior Court, 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796 (1985)).

We disapprove this particular language in Trimble III and its reliance on Brandt. The Brandt case stands for a much broader exception than we choose to adopt in this ease. Brandt concerned an insured who was injured in an accident. The insured made a demand upon the disability insurer for payment of benefits, but the insurer unreasonably refused to pay. Brandt v. Superior Court, 37 Cal.3d 813, 210 Cal.Rptr. 211, 212, 693 P.2d 796, 797 (1985). The insured then filed an action against the insurer for: 1) breach of contract, 2) breach of the covenant of good faith and fair dealing, and 3) violation of California statutory prohibitions against unfair claims practices. Under his cause of action for breach of good faith and fair dealing, the insured included as damages the attorney fees he incurred in connection with his breach of contract claim. Id., 210 Cal.Rptr. at 212-13, 693 P.2d at 797-98. The insurer successfully moved to strike the portion of the complaint requesting attorney fees. The California Supreme Court then exercised jurisdiction over the case and issued a writ of mandate directing the trial court to reinstate the demand for attorney fees as damages. Id., 210 Cal.Rptr. at 215, 693 P.2d at 801.

The reasoning employed by the Brandt majority in allowing the claim for attorney fees to stand was as follows: if the insurer’s tortious conduct compelled the insured to retain an attorney to obtain benefits due under the contract, then the attorney fees would be recoverable damages proximately caused by the tort. Brandt, 210 Cal.Rptr. at 212, 693 P.2d at 798. This diverges from the exception recognized in Colorado and applied in the Trimble line of cases. In the Trimble cases, the insured was forced to provide his own legal defense even though his insurance policy explicitly stated that the insurer would provide it. Thus, the attorney fees he sought to recover represented the actual legal defense the insurer should have provided for him. Under the Brandt facts, however, the insured did not hire legal representation in order to defend against a third party claim, but instead hired legal representation to force the insurer to provide him with disability payments. Thus, while the disability payments were an actual benefit of the contract denied to him, the attorney fees were only incidental to his efforts to gain this benefit.

We find the dissent in Brandt persuasive in reasoning that if recovery were allowed for attorney fees stemming from a suit to enforce any wrongful withholding of benefits under an insurance contract, this would effectively swallow the entire American rule on attorney fees. Brandt, 210 Cal.Rptr. at 217, 693 P.2d at 803 (Lucas, J., dissenting). Unless we are prepared to abandon the American rule for the English rule of automatically awarding attorney fees to the prevailing party, it would be difficult to carve out an exception that allows an award of attorney fees that are incidental to the bringing of a bad faith breach of contract action. Attorney fees are incurred by most parties to most lawsuits. If the goal were always to make the prevailing party genuinely whole, these fees would be an element of damage. But such is not the law. Thus, we confine the applicable exception in Colorado to where the attorney fees directly represent a benefit of the contract wrongfully denied by the opposing party.

Therefore, even if Bernhard were correct in submitting good faith and fair dealing to be a benefit of the contract, attorney fees incurred in her action against Farmers to obtain good faith and fair dealing are a consequence of, or are incidental to, her claim and are not recoverable.

III.

In conclusion, we hold that Bernhard’s claim for attorney fees incurred in bringing a bad faith breach of insurance contract action does not fit into any exception to the American rule recognized in Colorado. Furthermore, we decline to carve out an additional exception since we find no principled way to create such an exception while still upholding the general principles of the American rule. We therefore conclude that an insured must bear the cost of attorney fees incurred in bringing a bad faith breach of insurance contract action. We affirm the court of appeals and remand the case for further proceedings consistent with this opinion.

LOHR, J., dissents. SCOTT, J., does not participate.

1 . Farmers also informed Bernhard that she had the right to retain her own attorney to assist in her defense, which she then did. However, in the case before us Bernhard is not seeking reimbursement for the money she spent in retaining counsel to aid in her defense against the underlying personal injury action. Instead, the only attorney fees at issue here are the fees she incurred in bringing the bad faith breach of contract claim.

2 . Attorney fees are addressed in Title 13, Article 17 of the Colorado Revised Statutes. Under this statutory scheme, a trial court has the discretion to award attorney fees if the bringing or defense of an action has been "substantially frivolous, substantially groundless, or substantially vexatious." § 13-17-101, 6A C.R.S. (1987). In addition, Colorado’s rules of civil procedure also authorize the award of attorney fees .' in specific circumstances. These rules are discussed in Bunnett v. Smallwood, 793 P.2d 157, 162 (Colo. 1990).

3 . Exceptions to the American rule recognized in Colorado include those based on: the "common fund” doctrine, County Workers Compensation Pool v. Davis, 817 P.2d 521 (Colo.1991); a parly’s bad faith and lack of candor in dealing with the court, Johnston v. District Court, 196 Colo. 1, 580 P.2d 798 (1978); breach of fiduciary duty or breach of trust, Buder v. Sartore, 774 P.2d 1383 (Colo.1989); Heller v. First Nat’l Bank, N.A., 657 P.2d 992 (Colo.App.1982); and a party’s wrongful act proximately causing the wronged party to become engaged in litigation with others, Publix Cab Co. v. Colorado Nat’l Bank, 139 Colo. 205, 338 P.2d 702 (1959).

In this last exception, the fees incurred by the wronged party in the third party suit may be recovered in a later action against the wrongdoer, whereas the fees incurred in bringing the actual action against the wrongdoer are not recoverable. This exception encompasses attorney fees arising out of a variety of actions including: a quiet title action, Elijah v. Fender, 674 P.2d 946 (Colo. 1984); an action in fraud, International State Bank v. Trinidad Bean & Elevator Co., 79 Colo. 286, 245 P. 489 (1926); and a malicious prosecution, Bernstein v. Simon, 77 Colo. 193, 235 P. 375 (1925); see also Technical Computer Servs., Inc. v. Buckley, 844 P.2d 1249 (Colo.App. 1992) (attorney fees incurred in defending false criminal charges are recoverable in later malicious prosecution action against party that caused false charges to be brought, but fees incurred in bringing the malicious prosecution action itself are not recoverable).

An additional exception is recognized in Bunnett v. Smallwood, 793 P.2d at 161, see discussion infra p. 1288.

4 . Paine, Webber, Jackson and Curtis, Inc. v. Adams, 718 P.2d 508, 515-18 (Colo. 1986) (holding that whether a broker has become a fiduciary of a customer depends on the degree of control the broker has over the customer’s account, involving factors such as the amount or lack of approval required before the broker acts on the customer's account, the relative sophistication of the customer, and the trust and confidence that the customer places in the broker); McCracken v. Conticommodity Servs., Inc., 755 P.2d 454, 456 (Colo.App.1988) (ruling that broker who has no practical control over decisions regarding customer's account did not owe customer a fiduciary duty); see also CJI-Civ.3d 26:2.