Kelmo Enterprises, Inc. v. Commercial Union Insurance

426 A.2d 680, 285 Pa. Super. 13

• Court: Superior Court of Pennsylvania
• Decided: May 6, 1981
• Docket: 2324
• Status: Published

Opinions

HOFFMAN, Judge:

Appellant contends: (1) that it had no duty to defend appellees in an underlying tort action because the insurance policy issued by appellant denied coverage; and (2) that the lower court erred in awarding appellees attorneys’ fees in this declaratory judgment proceeding. We disagree with both contentions and, accordingly, affirm the order of the lower court.

Appellees owned and operated the Mr. Bojangles Bar in Wilkes-Barre, Pennsylvania. On June 3, 1974, the bartender, Robert Donnelly, and/or his brother, Richard, hosted a private party at the bar. The party was conducted without the knowledge or permission of appellees on a day on which the bar was not open for business. After the party, a guest, Lee Clark Kitzmiller, remained with the Donnellys to clean the bar. Subsequently, Kitzmiller left the premises and was killed when he lost control of his motorcycle and struck a utility pole. On August 2, 1974, the administrator of the Kitzmiller estate commenced an action in trespass against appellees by issuing a writ of summons. On August 5, appellees orally notified appellant, their insurer, of the service of the writ. By letter dated August 9, appellees gave formal notice and requested appellant to undertake defense of the underlying tort action.¹

The insurance policy issued by appellant provided coverage for all bodily injury and property damage “caused by an occurrence and arising out of the ownership, maintenance or use of the insured premises and all operations necessary or incidental thereto.” Additionally, the policy provided that appellant “shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage.... ” The policy contained an exclusion which purported to deny coverage for bodily injury arising from an illegal sale of alcohol, or from the sale to a minor or to a person under the influence of alcohol.² Notwithstanding the fact that no complaint had been filed, appellant denied coverage in a letter stating:

The allegations ... set forth by the attorney for the Plaintiff in the action against you which has been filed by Writ of Summons in Trespass in the Luzerne County Courts, are that you are negligent by the serving of alcoholic beverages to a minor and serving of alcoholic beverages to a visibly intoxicated person.

The above mentioned policy which runs from the term of 7/8/73 to 7/8/74 does not provide any coverage regarding this claim.

I herewith return the Summons and respectfully decline any coverage under the aforementioned policy.

Because appellant repeatedly refused to undertake their defense, appellees engaged private counsel to defend the Kitzmiller action.

On June 17, 1976, while the Kitzmiller. action was still pending, appellees filed a petition for declaratory judgment, seeking an adjudication of their rights under the policy and an award of counsel fees for the defense of the Kitzmiller action. On the basis of the pleadings and depositions, the lower court held that appellant was required to defend appellees.³ After further proceedings, the lower court awarded appellees counsel fees and costs in the defense of the Kitzmiller action ($5,887.00) and in the prosecution of the declaratory judgment action ($12,024.25). This appeal followed.

Appellant contends that it had no duty to defend appellees in the Kitzmiller action because the policy excluded coverage for liability arising from the sale of alcohol to minors and persons under the influence of alcohol. Appellees argue, however, that even if the exclusion were applicable, appellant could not rely upon it because appellant failed to prove that appellees were aware of and understood the effect of the exclusion. We agree. In Hionis v. Northern Mutual Insurance Co., 230 Pa.Super. 511, 516-17, 327 A.2d 363, 365-366 (1974), we held that an insurer has the burden of establishing the insured’s awareness and understanding of an exclusion regardless of the clarity or ambiguity of the policy language. Because the insurer in that case failed to prove that the insured, a restaurateur, was aware of and understood the effect of the exclusion in his fire insurance policy, we affirmed the order of the lower court directing a verdict for the insured. In Klischer v. Nationwide Insurance Co., 281 Pa.Super. 292, 422 A.2d 175 (1980), the lower court had instructed the jury that the insurer had the burden of proving its insured’s awareness and understanding of an exclusion in an accidental death benefit rider. The jury returned a verdict for the beneficiary. In affirming, we stated:

We adhere to our view expressed in Hionis. The major premise upon which Hionis rests is the vast inequality of bargaining power between the insurer and the typical purchaser of insurance. As a direct result of that disparity, the insurer may dictate the terms and conditions of the policy. Whether the policy is clear and precise or whether it is oblique and ambiguous, the disparity between the parties remains the same. Moreover, the insured’s primary interest, which is obtaining the maximum coverage for his insurance dollar, is no less valid when the policy is unambiguous than it is when the policy is obscure. The policies served by Hionis are particularly pertinent when, as here, the insured buys insurance expecting to be covered for certain risks. ... Insurers are not unduly burdened by a requirement that they explain the exclusions of their policies to insureds so that the insured can make an informed decision either to assume the excluded risks or to obtain additional insurance to protect against them.

Id., 281 Pa.Super. at 299, 422 A.2d at 178.

We conclude that appellant failed to meet its burden of establishing appellees’ awareness and understanding of the exclusion. The record amply demonstrates that appellees Mohanco and Kelly, laymen with no special expertise in insurance matters, sought insurance which would provide full coverage for any liability that might arise from their operation of a tavern business. Moreover, the uncontroverted testimony of the agent who sold the policy reveals that appellant did not even attempt to call the exclusion to the attention of the appellees. Therefore, we hold that appellant cannot rely upon the exclusion to escape its duty to defend appellees in the underlying tort action.

Appellant contends that the lower court erred in awarding to appellees attorneys’ fees and costs in the declaratory judgment action.⁴ Appellant first argues that the Declaratory Judgments Act⁵ contains no specific authorization for an award of attorneys’ fees. While that is true, the Act has been “declared to be remedial ... and is to be liberally construed and administered.” 42 Pa.C.S.A. § 7541(a). Moreover, the Act provides for supplemental relief:

Further relief, based on a declaratory judgment or decree, may be granted whenever necessary or proper. The application therefor shall be by petition to a court having jurisdiction to grant relief. If the application be deemed sufficient the court shall, on reasonable notice, require any adverse party, whose rights have been adjudicated by the declaratory judgment or decree, to show cause why further relief should not be granted forthwith.

42 Pa. C.S.A. § 7538. Similarly, 42 Pa. C.S.A. § 7541(b) provides: “Where another remedy is available the election of the declaratory judgment remedy .. . shall not affect the substantive rights of the parties, and the court may .. . take such other action as may be required in the interest of justice.” Thus, we hold that the mere fact that this is a declaratory judgment action will not preclude an award of attorneys’ fees and costs.

Appellant next contends that, as a general rule, each party to adversary litigation is required to pay his own counsel fees and costs in the absence of statutory or contractual obligation. See Chatham Communications, Inc. v. General Press Corp., 463 Pa. 292, 300-01, 344 A.2d 837, 842 (1975); Defulvio v. Holst, 239 Pa.Super. 66, 69-70, 362 A.2d 1098, 1099-1100 (1976). Accord, 16 G. Couch, Insurance 2d § 58:113 (1966). Another author has noted, however, that the general rule is unfair to the insured who is compelled to litigate the question of policy coverage.

[The general rule, that a litigant is to bear his own attorneys’ fees,] still appears to be unfair to the insured. After all, the insurer had contracted to defend the insured, and it failed to do so. It guessed wrong as to its duty, and should be compelled to bear the consequences thereof. If the [general] rule . .. should be followed ..., it would actually amount to permitting the insurer to do by indirection that which it could not do directly. That is, the insured has a contract right to have actions against him defended by the insurer, at its expense. If the insurer can force him into a declaratory judgment proceeding and, even though it loses in such action, compel him to bear the expense of such litigation, the insured is actually no better off financially than if he had never had the contract right mentioned above....

7C J. Appleman, Insurance Law & Practice, § 4691 (Berdal ed. 1979). Accord, Montgomery Ward & Co. v. Pacific Indemnity Co., 557 F.2d 51, 60 (3d Cir. 1977); Security Mutual Casualty Co. v. Luthi, 303 Minn. 161, 169-171, 226 N.W.2d 878, 884-85 (1975); Motorists Mutual Insurance Co. v. Trainor, 33 Ohio St.2d 41, 46-47, 294 N.E.2d 874, 877-878 (1973). We agree that it would be anomalous to allow an insured attorneys’ fees expended in defense of the underlying tort action but to deny the fees in an action brought to vindicate the contractual duty to defend.

Although federal courts, applying Pennsylvania law, have addressed this issue,⁶ no appellate court of this Commonwealth has considered the propriety of awarding attorneys’ fees to an insured who brings a declaratory judgment action against his insurer to enforce the contractual duty to defend. There is, however, a split of authority among the jurisdictions which have addressed the question. Although several courts have denied recovery,⁷ other courts, utilizing a variety of theories, have allowed the insured to recover his attorneys’ fees for the prosecution or defense of a declaratory judgment action. In Morrison v. Swenson, 274 Minn. 127, 142 N.W.2d 640 (1966), an insurer refused to defend a tort action arising from an automobile accident. The insured brought a third-party action in the nature of a declaratory judgment. The lower court held that the insurer had a duty to defend the insured and awarded the insured attorneys’ fees for the prosecution of the action against the insurer. In affirming, the Court acknowledged the general rule against recovering attorneys’ fees absent specific statutory authority, but stated nonetheless:

[T]his action is in the nature of an action to recover damages for the breach of contract. Legal fees incurred in the declaratory judgment action were damages arising directly as the result of the breach. We think that the injured party in an action of this kind ought to be permitted to recover whatever expenses he has been compelled to incur in asserting his rights, as a direct loss incident to the breach of contract. See, 7A Appleman, Insurance Law and Practice, § 4691.

Id. at 137, 142 N.W.2d at 640. Accord, New Hampshire Insurance Co. v. Christy, 200 N.W.2d 834, 843-44 (Iowa 1972); Bankers & Shippers Insurance Co. of New York v. Electro Enterprises, Inc., 287 Md. 641, 647-649, 661-662, 415 A.2d 278, 282-83, 289 (1980); Cohen v. American Home Assurance Co., 255 Md. 334, 362-363, 258 A.2d 225, 239 (1969); Motorists Mutual Insurance Co. v. Trainor, supra, 33 Ohio St.2d at 46-47, 294 N.E.2d at 877-878; Gordon-Gallop Realtors, Inc. v. The Cincinnati Insurance Co., -S.C.-, -, 265 S.E.2d 38, 40 (1980); Hegler v. Gulf Insurance Co., 270 S.C. 548, 549-550, 243 S.E.2d 443, 444 (1978).

In New Hampshire Insurance Co. v. Christy, supra, the Supreme Court of Iowa held that the mere showing of a breach of the insurance contract was not a sufficient justification for the award of attorneys’ fees. The Court required additionally that the insured show that the insurer’s denial was in bad faith. The Court stated:

We are convinced the true rule should be that an insurer who refuses, contrary to its contractual obligation, to defend a third-party action against its insured on the ground the policy involved affords no coverage is liable for attorney fees incurred by the insured in defense of the action brought against him. But, this general rule does not serve to sustain an award for expenses incurred in an action to establish insurance coverage unless there is a showing made in the declaratory judgment action that the insurance company has acted in “bad faith or fraudulently or was stubbornly litigious.” ...

200 N.W.2d at 845 (emphasis added). Accord, Montgomery Ward & Co. v. Pacific Indemnity Co., supra at 60; Fidelity & Casualty Co. of New York v. Riley, 380 F.2d 153, 156 (5th Cir. 1967); Mattocks v. Daylin, Inc., supra at 516; Maryland Casualty Co. v. Sammons, 63 Ga.App. 323, 326-27, 11 S.E.2d 89, 91-92 (1940); Glidden v. The Farmers Automobile Insurance Ass’n., 57 Ill.2d 330, 339, 312 N.E.2d 247, 252 (1974); American States Insurance Co. v. Walker, 26 Utah 2d 161, 164-165, 486 P.2d 1042, 1044 (1971).⁸

We agree with the rationale of the Supreme Court of Iowa as stated in New Hampshire Insurance Co. v. Christy, supra, and hold that an insured who is compelled to bring a declaratory judgment action to establish his insurer’s duty to defend an action brought by a third party may recover his. attorneys’ fees incurred in the declaratory judgment action if the insurer has, in bad faith, refused to defend the action brought by the third party.⁹ Because the lower court specifically found that appellant’s refusal to defend the Kitzmiller action was unreasonable and in bad faith, the award of the attorneys’ fees for the prosecution of the declaratory judgment action was proper.¹⁰

Order affirmed.

CERCONE, President Judge, files a concurring opinion. WATKINS, J., files a dissenting opinion.

1 . After appellant’s refusal to undertake the defense and upon the completion of discovery, the administrator discontinued his action. On December 26, 1974, the administrator commenced a second trespass action by complaint which alleged that appellees had served, sold, furnished or gave alcoholic beverages to the decedent, a minor, while he was visibly intoxicated. Subsequently, an amended complaint added a cause of action which alleged that appellees negligently assisted the decedent onto his motorcycle and assisted him in starting it. The record does not reflect the present status of this action.

2 . The exclusion provides, in pertinent part:

This insurance does not apply: ...

(h) to bodily injury or property damage for which the insured or his indemnitee may be held liable

(1) as a person or organization engaged in the business of manufacturing, distributing, selling or serving alcoholic beverages, or

(2) if not so engaged, as an owner or lessor of premises used for such purposes, if such liability is imposed

(i) by, or because of the violation of any statute, ordinance or regulation pertaining to the sale, gift, distribution or use of any alcoholic beverage, or

(ii) by reason of the selling, serving or giving of any alcoholic beverage to a minor or to a person under the influence of alcohol or which causes or contributes to the intoxication of any person; but part (ii) of this exclusion does not apply with respect to liability of the insured or his indemnitee as an owner or lessor described in (2) above ....

3 . The lower court reasoned that while the exclusion constitutes an affirmative defense which the insurer must prove, any ambiguity in the policy must be construed against appellant. Because, by its express language, the exclusion applied only “if such liability is imposed,” the lower court held that appellant was required to undertake appellees’ defense in the Kitzmiller action. Because we affirm on an alternative ground, we express no view on the propriety of the lower court’s analysis of the exclusionary clause.

4 . Appellant also contends that the lower court erred in awarding to appellees their attorneys’ fees and costs in defending the Kitzmiller action. We disagree. Because our cases are well settled that in an action in assumpsit for the breach of a covenant to defend recovery includes the costs of hiring counsel and other costs of defense, the lower court properly awarded appellees attorneys’ fees for the defense of the Kitzmiller action. See Gedeon v. State Farm Mutual Automobile Insurance Co., 410 Pa. 55, 188 A.2d 320 (1963); Cadwallader v. New Amsterdam Casualty Co., 396 Pa. 582, 152 A.2d 484 (1959); University Club v. American Mutual Liability Insurance Co. of Boston, 124 Pa.Super. 480, 189 A. 534 (1937). See generally Annot., 49 A.L.R.2d 694, 721-33 (1956).

5 . 42 Pa. C.S.A. § 7531 et seq., superseding The Uniform Declaratory Judgments Act, 12 P.S. § 831 et seq.

6 . See Montgomery Ward & Co. v. Pacific Indemnity Co., supra; Mattocks v. Daylin, Inc., 452 F.Supp. 512 (W.D.Pa.1978), aff'd mem., 614 F.2d 770 (3d Cir. 1979).

7 . E. g., O’Morrow v. Borad, 27 Cal.2d 794, 801, 167 P.2d 483, 487 (1946); Fazzino v. Insurance Co. of North America, 153 Cal.App.2d 304, 309, 313 P.2d 178, 181 (1957); Mighty Midgets, Inc. v. Centennial Insurance Co., 47 N.Y.2d 12, 21-22, 389 N.E.2d 1080, 1084-1086, 416 N.Y.S.2d 559, 563-565 (1979); Cincinnati Insurance Co. v. Shelby Mutual Insurance Co., 542 S.W.2d 822, 825 (Tenn.App.1975). See generally 7C J. Appleman, supra at § 4691; 16 G. Couch, supra at § 58:113.

8 . Cf. Hayes v. Erie Insurance Exchange, 261 Pa.Super. 171, 176-77, 395 A.2d 1370, 1373 (1978) (insured not entitled to an award of attorneys’ fees from his no-fault insurer absent a showing of bad faith).

9 . In so holding, wé do not decide whether an insured who sues his insurer may recover his attorneys’ fees absent a pending action brought by a third party against the insured. See Abbey v. Farmers Insurance Exchange, 281 Minn. 113, 160 N.W.2d 709 (1968) (attorneys’ fees not allowed when insured sued to recover disability benefits denied by insurer).

10 . Appellant also contends that the award of attorneys’ fees and costs incidental to the prosecution of the declaratory judgment action was excessive. We disagree. The reasonableness of attorneys’ fees is a matter committed to the sound discretion of the lower court whose decision will be disturbed only if there is a clear abuse of discretion. See, e. g., LaRocca Estate, 431 Pa. 542, 547-49, 246 A.2d 337, 339 (1968). The record shows that the fees and costs were $12,024.25, were reasonable and necessary, and were actually incurred. We cannot conclude, on the present record, that the lower court abused its discretion.