Gallant Insurance Co. v. Oswalt

762 N.E.2d 1254, 2002 Ind. App. LEXIS 188, 2002 WL 207448

• Court: Indiana Court of Appeals
• Decided: February 12, 2002
• Docket: 43A04-0104-CV-148
• Status: Published

Opinions

OPINION

BARNES, Judge.

Case Summary

This case arises from the trial court's grant of summary judgment against Gallant Insurance Company in a proceedings supplemental action brought by Jeffrey Oswalt. We affirm in part and reverse in part.

Issues

Gallant raises three issues for our review, which can be consolidated and restated as the following two issues:

I. whether the trial court erred in granting summary judgment in spite of Gallant's showing that it had defended Chadwick under a reservation of rights; and

II. whether the trial court erred by not granting Gallant's cross-motion for summary judgment in its declaratory judgment action.

Facts¹

Jeffrey Oswalt sued Donald Chadwick on December 13, 1996, claiming personal injuries resulting from an automobile accident that had occurred on June 22, 1996. On April 7, 1997, Gallant notified Chadwick in writing that because he had failed to comply with the terms and conditions of his insurance policy, it would be proceeding in his defense under a reservation of rights. Due to difficulty in communicating with Chadwick, Gallant performed a skip-trace on August 20, 1998, to locate him. When the skip-trace revealed a new address, Gallant advised him a second time, on October 8, 1998, that it was defending Oswalt's claim against him under a reservation of rights due to his failure to cooperate in the defense. On October 28, 1998, Chadwick assisted the counsel Gallant had retained, Kenneth Wilk, in completing Os-walt's "First Set of Interrogatories."

Despite counsel's admonishments to Chadwick that it was necessary to be present for trial, he failed to appear. On October 18, 1999, at the conclusion of a two-day jury trial, Oswalt obtained a judgment of approximately $56,000 against Chadwick. On January 26, 2000, Oswalt initiated proceedings supplemental to execution, naming Gallant Insurance Company as garnishee-defendant. In its answer filed February 18, 2000, Gallant asserted Chadwick had "failed to appear for trial or otherwise cooperate" with Gallant in his defense, in so doing had breached the insurance policy issued him by Gallant, and thus was not entitled to coverage. Appendix p. 40.

Gallant next filed a motion for declaratory judgment on March 15, 2000, seeking the trial court's determination that it did not owe Chadwick coverage under the policy due to his failure to cooperate in defending Oswalt's suit. On January 10, 2001, Oswalt moved for summary judgment, filing a memorandum in support thereof and designating inter alia the affidavits of Chadwick and Oswalt's counsel, Michael Valentine. In relevant part, Chadwick averred that: he was insured by Gallant at the time of the accident; he had been "accessible by telephone" and had participated in "three or four phone discussions" with Kenneth Wilk, the first attorney Gallant retained to represent him; and he had "two conversations" with the attorney subsequently retained by Gallant to replace Wilk. Appendix pp. 68-69. He averred that he told the second attorney that he "understood the importance of attendance at the trial and ... wanted to be there," and had asked him "to try to have the date of the trial moved" so he could attend. Appendix p. 69. However, his affidavit also states that he had been informed that the trial date could not be changed.

The thrust of Valentine's affidavit was that Chadwick's counsel "never mentioned the defense of 'failure to cooperate'" to him "before, during or after the trial in this matter." Appendix p. 72. He also averred that Chadwick's counsel had not tried to change the trial date by informing him or the court of Chadwick's inability to attend, and that had he "known that [Chadwick's counsel] would attempt to assert the 'failure to cooperate' defense after the trial," he "would have attempted to use the Court's subpoena power to secure Mr. Chadwick's attendance at the trial in an effort to conserve judicial resources by avoiding this post-trial litigation." Appendix p. 78.

The trial court granted Oswalt's summary judgment motion on March 7, 2001, finding in part "[that neither at the trial of this action, nor prior thereto, was any claim made or presented to the Court that [Chadwick] failed to cooperate or in any way breached the cooperation clause of the underlying policy in this case." Appendix p. 10. Gallant appeals.

Analysis

Summary Judgment in Proceedings Supplemental

When reviewing a grant or denial of summary judgment, our well-settled standard of review is the same as it was for the trial court; whether there is a genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law. Hibler v. Conseco, Inc., 744 N.E.2d 1012, 1017 (Ind.Ct.App.2001) (citing Ind.Trial Rule 56(C)). Summary judgment is appropriate only when no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Id. A trial court's ruling on a motion for summary judgment reaches this court clothed with a presumption of correctness. Id. at 1018. When reviewing the trial court's ruling we will affirm on any theory supported by the material properly designated to the trial court. Id.

A trial court is vested with broad discretion in conducting proceedings supplemental. Hermitage Ins. Co. v. Salts, 698 N.E.2d 856, 858 (Ind.Ct.App.1998). Proceedings supplemental, as provided for in Indiana Trial Rule 69, are summary in nature because the claim has already been determined to be a justly owed debt reduced to judgment. Id. As this court recognized in Gallant Ins. Co. v. Wilkerson:

The filing of a motion for proceedings supplemental "speaks only to how the claim is to be satisfied, whereas the complaint in the original action speaks to whether the claim should be satisfied." Proceedings supplemental are merely a continuation of the underlying claim initiated under the same cause number for purposes of enforcing a judgment.

720 N.E.2d 1223, 1229 (Ind.Ct.App.1999) (citations omitted).

I. Reservation of Rights/Noncooperation as a Defense in Proceedings Supplemental

In addition to its discussion of the nature of proceedings supplemental, Wilkerson also stated the following proposition:

When an insurer questions whether an injured party's claim falls within the scope of policy coverage or raises a defense that its insured has breached a policy condition, the insurer essentially has two options: (1) file a declaratory judgment action for a judicial determination of its obligations under the policy; or (2) hire independent counsel and defend its insured under a reservation of rights.

Id. at 1227. In Wilkerson, we reviewed and affirmed the trial court's determination that Gallant had waived the defense of non-cooperation and was therefore es-topped from raising it during proceedings supplemental. 720 N.E.2d 1223, 1227-28 (Ind.Ct.App.1999). Those facts differed from this case as follows: at the time of trial the insured, Burton, was imprisoned at the Indiana Department of Correction and Gallant did not seek the assistance of the trial court to secure his attendance at trial. Furthermore, Gallant contacted Burton only twice prior to the trial. We noted:

"aln insurer may not raise a policy defense when it has defended and lost the underlying claim without reservation of rights." ... Gallant had a full and fair opportunity to raise Burton's alleged non-cooperation in the underlying tort action and could have protected its interests either by defending Burton under a reservation of rights or by filing a declaratory judgment action on the issue of his cooperation.

Id. at 1229, (quoting Western States Ins. Co. v. Weller, 299 Ill.App.3d 317, 233 Ill. Dec. 692, 701 N.E.2d 542, 545 (1998)) (emphasis added). Here, Gallant (1) performed a skip-trace to locate Chadwick; (2) attempted to contact Chadwick numerous times; (8) sent at least two separate letters indicating its reservation of rights; and (4) stressed to Chadwick the importance of his appearance at the trial and the potential consequences-including loss of coverage-if he did not appear. Clearly, the facts of Wilkerson are not on all fours with the facts of the instant case.

In Illinois Founders Ins. Co. v. Horace Mann, we reiterated the proposition that proceedings supplemental cannot be used as a collateral attack on the underlying judgment. 738 N.E.2d 705, 708 (Ind.Ct.App.2000) (citing Koors v. Great Southwest Fire Ins. Co., 538 N.E.2d 259, 260 (Ind.Ct.App.1989)). In proceedings supplemental to recover from a liability insurer, the judgment creditor bears the burden of showing a judgment, the insurance policy, and facial coverage under the policy. Gallant Ins. Co. v. Allstate Ins. Co., 723 N.E.2d 452, 454 (Ind.Ct.App.2000) (citing Hermitage, 698 N.E.2d at 859). In Horace Mann, we determined that a garnishee-defendant insurance company could not launch a collateral attack on the plaintiff's judgment by way of asserting the insured's non-cooperation because it had not so claimed at trial. 738 N.E.2d 705, 707-08 (Ind.Ct.App.2000). We cited Wilkerson, where we had noted the general rule that

an automobile liability insurer which learns before the trial of an action against its insured that the insured has breached the cooperation clause of the policy, and nevertheless defends him at trial, thereby waives or is estopped to assert the insured's noneooperation in a subsequent action to recover on the policy. This rule bas been applied in a number of cases in which the insured failed to appear at the trial of the original action brought against him or her, and where the insurer conducted the defense of the insured in his or her absence.

Id. at 708 (citing Wilkerson, 720 N.E.2d at 1229). We reasoned that the holding "comports with the underlying [equitable] purpose of proceedings supplemental." Id.

Horace Mann is also factually distinguishable from this case. In that case, we could "discern no evidence from the Record, nor does [insurer] provide us with any, to support even an inference that it took affirmative steps necessary to locate [the insured] and procure his attendance [at trial]." To the contrary, here, the record on appeal demonstrates that both counsel and Gallant attempted to locate Chadwick and to procure his attendance at trial. As we noted in Horace Mann, "when an insurer is prejudiced by the insured's noncompliance with the policy's provisions, the insurer is relieved of its liability under the policy." 738 N.E.2d at 707. Gallant was arguably prejudiced by Chadwick's noncompliance and failure to cooperate; whether the prejudice is sufficient to foreclose coverage under the terms of the insurance contract between Gallant and Chadwick can and should be determined by the declaratory judgment action, and is at least a question of fact precluding summary judgment in Oswalt's favor at this juncture. Thus, we hold that because Gallant proceeded under a reservation of rights, it was entitled to raise the defense of Chadwick's non-cooperation, and that as such, the trial court erred in granting summary judgment to Oswalt.

The dissent correctly notes that there was "a duty on the part of Gallant to defend." Op. at 1266. Indeed, it is axiomatic that "an insurer's duty to defend is broader than its coverage for liability or its duty to indemnify." Indiana Farmers Mut. Ins. Co. v. Ellison, 679 N.E.2d 1378, 1381-82 (Ind.Ct.App.1997), trans. denied. "The duty to defend is determined from the allegations of the complaint and from the facts known or ascertainable by the insurer after an investigation has been made." Id. at 1382 (emphasis added). If the pleadings fail to disclose a claim within the coverage limits, or one that is clearly excluded under the policy, and investigation reveals that the claim is outside the coverage of the policy, no defense is required. Id. As a matter of law, however, the insurer has a duty to conduct a reasonable investigation into the facts underlying the complaint before it may refuse to defend the complaint Monroe Guar. Ins. Co. v. Monroe, 677 N.E.2d 620, 624 (Ind.Ct.App.1997), trans. dismissed. See also Liberty Mut. Ins. Co. v. Metzler, 586 N.E.2d 897, 902 (Ind.Ct.App.1992) (stating, "[An insurer] can refuse to defend or clarify its obligation by means of a declaratory judgment action. If it refuses to defend it does so at its peril ....") (emphasis added).

Based on our prior decisions such as Wilkerson and Horace Mann, insurers may fulfill that broad duty while at the same time reserving their right to disavow coverage after investigation. The dissent even acknowledges that "until Chadwick failed to appear and assist in the defense, ... Gallant was under a prospective obligation to pay any judgment up to the $25,000 policy limits." Op. at 1266 (emphasis added). However, Chadwick did fail to appear and assist in the defense, and at that point the right to dispute coverage-the right Gallant had reserved as explicitly as possible-arose.

Furthermore, in Horace Mann, unlike in the instant case, the insurer never asserted it had made a proper reservation of rights. Here, it is significant that Gallant did proceed under a reservation of rights, one of the options dictated by Wilkerson. The problem addressed by Horace Mann is a different one. Gallant's asserting the defense of non-cooperation, onee it had reserved its right to do so as between itself and Chadwick, is not necessarily the sort of "collateral attack" contemplated by Horace Mann. We posit that as long as an insurer asserts a liability defense as soon as the insurer becomes aware of the applicability of the defense-as did Gallant here, by proceeding under a reservation of rights and by filing a declaratory judgment action-then raising that same defense at the proceedings supplemental stage is not tantamount to a "collateral attack."

In Motorists Mut. Ins. Co. v. Johnson, cited by the dissent, we stated that "ILwjords or conduct of an insurer inconsistent with an intention to rely on the requirements of the policy, if they lead the insured into belief that those requirements will not be insisted upon, suffice to constitute waiver." 139 Ind.App. 622, 633, 218 N.E.2d 712, 718 (1966). We also noted that the concept of "cooperation" with an insurer in litigation "implies not an abstract conformity to ideal conduct but a pragmatic question to determined in each case in the light of the particular facts and cireumstances." 139 Ind.App. at 631, 218 N.E.2d at 717. The Johnson court further stated, "A technical or inconsequential lack of cooperation has often been held insufficient to void the policy and the lack of cooperation to be sufficient must be in some substantial and material respect. Non-cooperation must be material. Prejudice must be shown by insurer." 139 Ind.App. at 628, 218 N.E.2d at 715 (citations omitted).

Similarly, in Miller v. Dilts, also cited by the dissent, our supreme court considered three cases specifically involving the insureds' failures to notify their insurance carriers of the accidents arguably invoking coverage, and stated the common issue as "whether there is a difference between a duty to give prompt notice and a duty to cooperate in an automobile insurance policy." 463 N.E.2d 257, 260 (Ind.1984). The court answered the question in the negative and held that "each violation requires a showing of prejudice to the insurer in order to avoid coverage under the policy." Id.

Citing these cases, the dissent questions whether Gallant proceeded under a valid reservation of rights and evaluates Gallant's attempts at such a reservation, finding them inadequate. However, we be-leve it is inconsistent to say that insurers must proceed under a reservation of rights while also holding that a letter that says, "this notice is given to you to reserve the rights of the Company" does not effect that end. Appendix p. 116 (emphasis added).

We conclude that the language the dissent cites from the April 7, 1997, letter from Gallant to Chadwick must be considered in the context of the entire letter. Specifically, the first sentence of the letter reads, "You are hereby notified that Gallant Insurance Company takes position [sic] that you have breached your contract of insurance." It also states that Chadwick had breached the contract by not forwarding the summons and complaint. The letter does not end there, however, but further states that, "Gallant Insurance does not waive any of the terms or conditions of your insurance policy and it does mot waive any rights of the Company [,]" and concludes:

This notice is given to you to reserve the rights of the Company and to permit the Company to investigate and defend this matter without the Company assuming any liability under the policy. Be advised that you have the right to retain additional counsel on your behalf and at your own expense.

Appendix p. 116 (emphases added).

We take no issue with the notion, advanced by the dissent, that prejudice resulting from material non-cooperation must be shown by the insurer to avoid coverage. However, we submit that the dissent strays from the mark in stating that such prejudice must be irrefutably proven before the insurer can assert or attempt to assert a reservation of rights. Certainly, the resolution of a subsequent declaratory judgment action turns on whether the insurer can demonstrate prejudice resulting from material non-cooperation. But because the duty to defend is broader than the duty to indemnify, the insurer must first reserve the right to deny coverage later, via, for example, a declaratory judgment action, while at the same time it appears and defends the insured. Otherwise, it risks a bad-faith action for breach of the duty to defend. Such is the purpose of a reservation of rights: to allow the insurer to fulfill the broad duty to defend while at the same time investigating and pursuing the narrower issue of whether indemnification will result. We cannot decide the question whether the breach was material and whether the insurer was prejudiced thereby where, as here, the context is a summary judgment occurring only after the insurer has fulfilled its duty to defend. We do have to decide whether there is a question of fact about the validity of the reservation, and decline to hold that here, the reservation was not valid because the insurer had indicia that the insured might not cooperate well before he failed to appear for trial, and took all the steps it knew to take in order to effect a valid reservation of rights. As we noted in Wilkerson, "had there been any indicia of non-cooperation other than Burton's failure to attend the trial in this case, we may have reached a different result" 720 N.E.2d at 1229, n. 6. Here, there were indicia of non-cooperation, which properly led to a reservation of rights.

Additionally, in Horace Mann we acknowledged that "a liability insurer may stay proceedings supplemental while pursuing a separate declaratory action to determine the insurer's liability under the policy." 738 N.E.2d at 708 (citing Wilkerson, 720 N.E.2d at 1227). Here, the proceedings supplemental were initiated on January 26, 2000. In its answer filed February 18, 2000, Gallant availed itself of its first true opportunity to claim Chadwick's non-cooperation (e., his failure to appear at the trial in late 1999) as a defense to liability.² Then, almost ten months before Oswalt filed the summary judgment action from which Gallant now appeals, Gallant initiated its declaratory judgment action, on March 15, 2000. It would have been appropriate for the trial court to stay the proceedings supplemental during the pen-dency of the declaratory judgment action.

We further wish to address a practical aspect we did not speak to in Horace Mann, Wilkerson, Johnson, or Miller: namely, the ethical prohibition upon insurance counsel to "volunteer" the fact of a client's non-cooperation to the trial court or to the plaintiff, In his memorandum in support of summary judgment, Oswalt stated, "shortly before the original trial date in this cause Gallant replaced Mr. Wilk with the law office of Conover & Foos. Duke [Eskew] became counsel for Chadwick." Appendix p. 60. "The 'failure to cooperate' defense was raised by Gallant for the first time on March 15, 2000, more than five months after the jury trial." Id. It seems to us inappropriate to place the onus of disclosure of the insured's putative non-cooperation upon counsel obtained by the insurance company to represent the insured. Such a rule would likely run afoul of Professional Conduct Rule 1.6, which provides in relevant part, "(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation...."

In Cincinnati Ins. Co. v. Wills, our supreme court found "no inherent conflict" in the practice of defense of claims litigation by insurance company house or captive counsel. 717 N.E.2d 151, 152 (Ind.1999). In that case, the defendant-insured, like Chadwick, was advised that although insurance counsel was employed and paid by the insurer, counsel's "ethical obligations" were owed to the defendant-insured alone. Id. If a plaintiff such as Oswalt wishes to inquire during discovery as to whether an insured's non-cooperation has been or threatens to become an issue as litigation continues-and/or to inquire whether the insurance carrier is proceeding under a reservation of rights-it may do so. At that point, the insured's counsel-who may or may not be retained by the insurance company, but in either case may or may not be aware of the extent to which the insured is "cooperating" under the terms of the insurance contract-can inquire of the insurance company and give the appropriate response. The ethical difference is between volunteering the information and responding truthfully when asked. We find nothing in the record on appeal to indicate here that Oswalt asked the question. We therefore depart from Horace Mann to the extent that it stands for the proposition that it is incumbent upon an insured's defense counsel to vol-wnteer information potentially adverse to his client. Put another way, counsel should not be called upon suddenly to "change hats" and speak in and for the insurer's interests when his role has previously been and should remain that of a zealous advocate for his client, the insured.

The dissent offers that "the injured plaintiff is entitled to be put on notice that collection of any judgment which might be rendered in his favor has been jeopardized.... At a minimum, the injured plaintiff should be apprised if and when the insurer notifies the insured that the defense is proceeding under a reservation of rights." Op. at 1265. We agree that such a scheme would alleviate or minimize the problem of going through trial and obtaining judgment only to be faced later with the inability to collect that judgment because of a coverage dispute between the insurer and the insured. But the requirement of such a disclosure is not currently the law in Indiana.

II. Gallant's Summary Judgment Motion

Gallant also argues that the trial court erred in not granting its eross-motion for summary judgment on its declaratory judgment action. In the declaratory judgment context:

The interpretation of an insurance policy is primarily a question of law for the court. The provisions of an insurance contract are subject to the same rules of interpretation and construction as are other contract terms.

In construing a written insurance contract, we may not extend insurance coverage beyond that provided in the contract, nor may we rewrite the clear and unambiguous language of an insurance contract. A contract will be found to be ambiguous only when it is susceptible to more than one interpretation and reasonable persons would honestly differ as to its meaning. An ambiguity is not established simply because a controversy exists, and one party asserts an interpretation contrary to that asserted by the opposing party.

American States Ins. Co. v. Adair Indus. Inc., 576 N.E.2d 1272, 1278-74 (Ind.Ct.App.1991).

Gallant argues that it was clearly prejudiced by Chadwick's failure to cooperate: "the possibility of finding witnesses [to support] Chadwick's version of events or identifying the drivers in front of Oswalt's vehicle was hampered because he did not provide his version of events until two years and four months after the accident, ignoring requests to fill out forms in the process." Appellant's Brief p. 20. In addition, Gallant claims prejudice due to Chadwick's failure to keep it apprised of his address changes, failure to respond to various attorney communications, and failure to appear for trial. Chadwick's affidavit, on the other hand, states in relevant part: ,

5. Gallant Insurance Company did not inform me about any mediation conferences or settlement negotiations.

6. I was accessible by telephone and had three or four phone discussions with Attorney Kenneth Wilk about the accident.

7. Although I did discuss this case with Attorney Kenneth Wilk, we did not discuss any defenses to Mr. Oswalt's claim against me.

8. I was accessible by telephone after my insurer changed attorneys and had two conversations with Attorney Duke Eseue [sic] about the accident and upcoming trial.

9. Although I did discuss this case with Attorney Duke Eseue [sic], we did not discuss any defenses to Mr. Oswalt's claim against me....

Appendix pp. 158-59. Gallant urges us that this affidavit is "self-serving" and is "insufficient to create a genuine issue of material fact on this issue." Appellant's Brief p. 21. Gallant cites Chadwick's interrogatory answers, submitted on October 28, 1998, to attorney Wilk, in which he stated in part that he believed he saw the driver of Oswalt's car (his wife, Kimberly Oswalt) "getting into her purse or s[lolme-thing while driving." Appendix p. 156.

When reviewing a summary judgment ruling, we construe the pleadings and designated materials in a light most favorable to the non-movant, giving careful serutiny to ensure that the losing party is not improperly denied its day in court. Becker v. Four Points Inv. Corp., 708 N.E.2d 29, 30 (Ind.Ct.App.1999), trans. denied. When viewed in the light most favorable to Chadwick as non-movant in the declaratory summary judgment claim, we find this dispute over whether there existed a defense to coverage to be a genuine issue of material fact. We note that one of the grounds on which Gallant claims prejudice-the hampering of the development of a defense by Chadwick's foreclosing "the possibility of finding witnesses ... or identifying the drivers in front of Oswalt's vehicle"-is tenuously supported at best. For instance, in the same interrogatories Gallant cites, Chadwick was asked to "[sitate the full name and address of each person who witnesses or claimed 'to have witnessed the happening of the casualty complained of in this action[,]" to which Chadwick answered, "None of which I am aware." Appendix p. 139. It would seem that Gallant could have pursued other methods, such as police reports or the depositions of other drivers, to begin to develop any defense it believed existed. At the very least, however, just as we concluded that the trial court should not decide this same issue in Oswalt's favor when presented with a summary judgment motion in the proceedings supplemental, we also conclude that reasonable persons could honestly differ as to whether Chadwick's alleged failure to cooperate so greatly prejudiced Gallant as to relieve it completely of liability.

Conclusion

Because Gallant successfully preserved the defense of Chadwick's non-cooperation via its reservation of rights, the trial court erred in granting Oswalt summary judgment in his proceedings supplemental against Gallant as garnishee-defendant, and we reverse that summary judgment. However, because a genuine issue of material fact exists as to whether that noncooperation so prejudiced Gallant as to relieve it completely of liability in Oswalt's cause against Chadwick, we affirm the trial court's denial of summary judgment in Gallant's declaratory judgment action.

Affirmed in part and reversed in part.

MATTINGLY-MAY, J., concurs. SULLIVAN, J., dissents with opinion.

1 . We heard oral argument in Indianapolis on October 2, 2001. We appreciate the parties' enlightening and informative presentations.

2 . The dissent criticizes our characterization of this as Gallant's "first true opportunity" to claim non-cooperation. To characterize it as such is not, in our view, inconsistent with our conclusion that the earlier communications from Gallant to Chadwick were valid reservations of Gallant's right to disavow coverage. It was Gallant's "first true opportunity" to claim anything in the same forum as the underlying suit, to which it was not a party.