Loy v. Bunderson

320 N.W.2d 175, 107 Wis. 2d 400, 1982 Wisc. LEXIS 2564

• Court: Wisconsin Supreme Court
• Decided: June 2, 1982
• Docket: 79-1657
• Status: Published

Opinions

HEFFERNAN, J.

This is a review of a decision of the court of appeals¹ which reversed orders of the circuit court for Rock county, MARK J. FARNUM, Circuit Judge, which, pursuant to a declaratory judgment, approved a “special release” that had the effect of releasing General Casualty Company, the insurer of the automobile of Ralph Truesdill, one of the defendants in the action, and Truesdill personally, while leaving in the action Travelers Insurance Company, which, under its policy with Chambers & Owen, Truesdill’s employer, purported to afford liability coverage in the amount of $500,000 for non-owned (non-owned by Chambers & Owen) automobiles. Such coverage was to be afforded, under the terms of the policy, as “excess insurance over any other valid and collectible insurance available to the Insured.” General Casualty Company, Truesdill’s insurer, afforded a maximum liability coverage of $50,000.

The court of appeals, relying upon Heller v. Shapiro, 208 Wis. 310, 242 N.W. 174 (1932), concluded that the circuit court’s declaratory order approving the release constituted an abuse of discretion, because the controversy was not ripe for determination and, hence, not “justiciable” under the provisions of the Declaratory Judgments Act. On this basis alone, the court of appeals reversed. It did not address the merits of the controversy.

We reverse the court of appeals, because we conclude the controversy was justiciable, and we affirm the order of the circuit court confirming the provisions of the “special release.”

The first question posed is whether it is within the discretion of a circuit court to issue a declaration approving a proposed release of the named insured, Truesdill, and his insurance company, General Casualty, where, upon payment of $20,000, a release was given for the policy limits of $50,000, leaving intact the plaintiff’s cause of action against the “excess” insurer, Travelers, for any sums above $50,000 and within the $500,000 limits of the Travelers policy.

Additionally, if the proceeding to construe and approve the release constitutes a justiciable controversy, then the correctness of the court’s declaration on the merits is before us, particularly the court’s declaration embodied in its order that, under the release, upon release of Ralph Truesdill and General Casualty, the plaintiff could, nevertheless, pursue his cause of action against Travelers and that Travelers had a duty to defend Truesdill and, if liability were found, to pay any judgment based on Truesdill’s negligence in excess of $50,000. The release also provided that Travelers was to have no cause of action against General Casualty either by virtue of its dismissal from the lawsuit or by reason of any payments Travelers has made or may make in the future, either in the defense of the lawsuit or pursuant to any judgment.

Travelers contends that the provisions of the release, approved by the circuit court and included in its declaratory order, are erroneous as a matter of law.

We disagree with each of Travelers’ contentions.

This review has its origin in an automobile accident which occurred on January 23, 1978. Doris Loy was fatally injured when a vehicle driven by Donna Bunder-son invaded her lane of traffic and collided head-on. At approximately the same time, a vehicle driven and owned by Ralph Truesdill rear-ended the Loy vehicle.

Action was commenced by Ralph Loy, the deceased’s husband, against Bunderson and her insurer, State Farm Mutual Insurance Co., which carried liability limits of $25,000² and against Truesdill and General Casualty, the insurer on Truesdill’s personal vehicle. General Casualty afforded maximum liability coverage of $50,000. Because Truesdill was in the course of his employment with Chambers & Owen, the employer’s liability insurer, Travelers Insurance Company, with policy limits of $500,000, was joined as a defendant. Chambers & Owen was not made a party. The demand of the complaint was for $400,000. Issue was joined.

Although Travelers, in response to interrogatories, denied that Truesdill was an insured under its policy, it admitted in its answer that the automobile driven by Truesdill at the time of the accident was covered by its policy. While these statements, at least in the present stage of the proceedings, are not completely consistent, Travelers does not deny that Truesdill is covered by Travelers’ policy, as an employee of Chambers & Owen, driving an automobile not owned by Chambers & Owen.

General Casualty’s policy limits liability coverage to $50,000. Travelers’ policy extends coverage to limits of $500,000, but one of the conditions of the Travelers’ policy is:

“With respect to a hired automobile or a non-owned automobile, this insurance shall be excess insurance over any other válid and collectible insurance available to the Insured.”

The record shows — although Travelers, in this case, considers itself as an excess insurance carrier — this is not a situation in which a particular named insured purchased basic coverage and then purchased additional coverage in excess of its primary contract. Here, the fact of excess coverage is a mere coincidence. Truesdill contracted for his own insurance with General Casualty with limits to $50,000, while Chambers & Owen separately contracted with Travelers for coverage with limits of $500,000. It is only because of the recital in Travelers’ policy that its coverage is claimed to be excess over the limits afforded by the General Casualty policy. In the absence of General Casualty’s policy, Travelers’ coverage would commence at “dollar-one.” It is clear, then, that Travelers is not a true excess carrier, because the policy was not written under circumstances where rates were ascertained after giving due consideration to known existing and underlying basic or primary policies. Nothing in the record shows that Chambers & Owen was in any way benefitted in its premium structure by reason of the existence of Truesdill’s General Casualty policy.

After commencement of the lawsuit, settlement negotiations commenced. Originally, plaintiff proposed settlement for $60,000. Later, however, this demand was reduced to $30,000. General Casualty sought a 50 percent contribution from Travelers; but Travelers refused, because the settlement sum was within the limits of General Casualty’s policy, and presumably because of Travelers’ position that, under its own policy provision denominating it as an excess insurer, it had no responsibility for any exposure not in excess of primary coverage.

It was then that the parties worked out the proposed release that is the subject of the present appeal. This. settlement had as its goal the satisfaction of any claim of plaintiff up to $50,000, thus exonerating General Casualty and Truesdill, while permitting the plaintiff, Loy, to continue his action against Travelers for damages in excess of $50,000, but not in excess of Travelers’ limits of $500,000. Under this release, Loy agreed, in consideration of the payment of $20,000, to release General Casualty of all liability and also to release General Casualty’s named insured, Truesdill, up to, but not exceeding, $50,000. Hence, Truesdill was exonerated of any liability within General Casualty’s policy limits. All persons who incurred any liability by reason of Trues-dill’s negligence were also released up to $50,000. Trues-dill, Chambers & Owen, General Casualty, and Travelers were freed of any liability within the limits of Truesdill’s personal policy.

The claim of Loy against Travelers in the event of a judgment (because of Truesdill’s negligence) between $50,000 and $500,000 was expressly reserved. But Trues-dill and Chambers & Owen were released of any liability in excess of Travelers’ $500,000 coverage. In addition, Loy agreed to indemnify, defend, and hold Truesdill and General Casualty harmless in the event of any claim by Travelers and to offset any claim of the plaintiff against Travelers to the extent of any collectible claim of Travelers³ against Truesdill and General Casualty.

The parties to the proposed settlement moved for a declaration of rights permitting the parties to the proposed “special release” to settle and asked that the court declare that, upon compliance with the terms of the release, (1) Truesdill and General Casualty will be dismissed from the action; (2) Travelers is obligated to defend Truesdill because he was employed by Chambers & Owen, Travelers’ named insured; (3) Travelers was obligated to pay any judgment based on the negligence of Truesdill in excess of $50,000; and (4) Travelers had no cause of action against Truesdill or General Casualty by reason of their dismissal or by reason of any subsequent payment Travelers might make in settling the claim against Truesdill.

The affidavit accompanying the motion for the declaration recited that there was doubt as to Truesdill’s liability, in respect to both negligence and causation. The questionableness of Truesdill’s liability is not disputed. The affidavit also makes clear that, by reason of the settlement with General Casualty, any recovery which might be had against Travelers would be credited by the plaintiff with the sum of $50,000, the limits of the General Casualty policy. After hearing, the court entered an order declaring the rights of the parties. It found the controversy to be justiciable, and then proceeded to issue an order granting the motion in its entirety.

Upon Travelers’ appeal, the court of appeals reversed solely on the grounds that no justiciable controversy was presented to the court. We conclude that all the elements of justiciability were present; and, accordingly, it was appropriate for the circuit court to issue an order declaring the rights of the parties.

The motion was not brought specifically pursuant to sec. 806.04, Stats., the Uniform Declaratory Judgments Act, but, rather, was made to the court as a part of ongoing litigation. All parties, at all levels of the proceedings, have, however, tested the propriety of the declaration under the standards applicable to the Uniform Act. We conclude that the standards underlying the Act ought to be applied wherever a declaration of rights is sought.

The power of a court to declare rights is broad in scope. There is specific authority under sec. 806.04(1), Stats., to “declare rights, status, and other legal relations whether or not further relief is or could be claimed.”

It is exactly this that petitioners on this review sought to have declared: The rights and legal relationships of the parties in respect to each other in the factual context of the case.

Sec. 806.04(2), Stats., gives a court power to define the rights and legal relationship of parties who are arguably affected by a writing in the nature of a contract. Certainly, the underlying insurance policies fall within the express ambit of the statute. It is equally clear that the proposed release is cognizable and subject to construction under the statute.

Courts are admonished by sec. 806.04, Stats., that they may refrain from entering a declaratory judgment where the judgment, if entered, would not end the uncertainty faced by the parties. In the instant case, it is clear that the controversy faced by the parties was terminated by the entry of the court’s order and the subsequent execution of the release.

The controversy is not, and need not be, a controversy in respect to the whole negligence action. All that was posed by the motion is the effort to terminate the controversy between Loy, on one hand, and General Casualty and Truesdill, on the other. A declaration pursuant to the motion terminates any controversy between these parties. Moreover, it limits and defines the parameters of any controversies that remain. It seeks to terminate any possible controversy between Truesdill and his personal insurer in respect to a possible bad faith claim against the carrier, for, under the relief sought to be granted, Truesdill would be discharged of all liability within the policy limits of his own insurance policy and would no longer be subject to suit for any excess.

The numerous uncertainties which existed in respect to the relations between all the parties are clarified and those controversies terminated by the decree sought. The imminent and ripening controversy between General Casualty and Travelers is also laid to rest by the declaration. It is apparent from the correspondence between counsel and the colloquy at the hearing on the motion that Travelers considered that the present conduct of General Casualty was taken in bad faith. There were warnings at the hearing that General Casualty would be “made to pay.” The declaration approving the release and the conditions superimposed thereon would terminate the controversy that was inevitable and imminent between General Casualty and Travelers.

Moreover, the legislative direction in respect to the construction of sec. 806.04 (12), Stats., is:

“This section is declared to be remedial; its purpose is to settle and to afford relief from uncertainty and insecurity with respect to rights, status and other relations ; and is to be liberally construed and administered.”

We have frequently stated the standards for the exercise of trial court discretion to entertain and decide an action for declaratory relief. This court has relied upon the summarization of Borchard, Declaratory Judgments, which first appeared in State ex rel. La Follette v. Dammann, 220 Wis. 17, 22, 264 N.W. 627 (1936):

“The requisite precedent facts or conditions which the courts generally hold must exist in order that declaratory relief may be obtained may be summarized as follows:

“(1) There must exist a justiciable controversy — that is to say, a controversy in which a claim of right is asserted against one who has an interest in contesting it.

“(2) The controversy must be between persons whose interests are adverse.

“(3) The party seeking declaratory relief must have a legal interest in the controversy — that is to say, a legally protectible interest.

“(4) The issue involved in the controversy must be ripe for judicial determination. Borchard, Declaratory Judgments, pp. 26-57.”

We are of the opinion that a review of Borchard’s original text reveals that La Follette v. Dammann unduly fragmented the single rule or standards that Borchard suggested be used in determining whether or not it is property within the discretion of a trial court to entertain an action for declaratory action. All that Borchard required is “justiciability.” All other tangential considerations referred to in La Follette are components of that single test. This fact is specifically recognized in Lister v. Board of Regents, 72 Wis. 2d 282, 240 N.W.2d 610 (1976). A comparison of the Borchard text to the four-pronged test used by Justice Nelson in La Follette leads to the conclusion that Justice Nelson was perhaps the victim of a printer’s error. The punctuation of the summary and placement of the colon changes the meaning of Borchard’s analysis. A reasonable summary of Borchard’s position would require the following:

“There must exist a justiciable controversy — that is to say:

“(1) A controversy in which a claim of right is asserted against one who has an interest in contesting it.

“(2) The controversy must be between persons whose interests are adverse.

“ (3) The party seeking declaratory relief must have a legal interest in the controversy — that is to say, a legally protectible interest.

“(4) The issue involved in the controversy must be ripe for judicial determination. Borchard, Declaratory Judgments, pp. 26-57.”

Any other interpretation of Borchard fails to conform to the clear meaning of the text and has led to discursive and irrelevant exegeses, not only in the briefs of counsel over the years, but in the opinions of this court. The ultimate fact to be found by a circuit court in the exercise of its discretion is “justiciability.” If the controversy is “justiciable,” by definition it has all the characteristics set forth in the paragraph above. Hence, it is pointless and incorrect to consider justiciability merely as a component of what may be the subject of a declaratory judgment.

Travelers Insurance Company, understandably in view of this court’s somewhat incorrect statement of the test over the past forty-five years, asserts there was “no jus-ticiable controversy which was ripe for judicial determination.” By Borchard’s definition, a justiciable controversy is ripe for determination. We accordingly construe Travelers’ attack upon the court’s discretion to be but upon a single ground — that, because the controversy is not ripe for adjudication, it is not justiciable. Additionally, Travelers objects because the court is being called upon to render an advisory opinion. Borchard’s text is enlightening on these related concepts and demonstrates that, in the instant case, the court’s opinion is not advisory — the controversy is ripe.

Borchard, page 35, states:

“Actions or opinions are denominated ‘advisory,’ when there is an insufficient interest in the plaintiff or defendant to justify judicial determination, where the judgment sought would not constitute specific relief to a litigant or affect legal relations or where, by reason of inadequacy of parties defendant, the judgment could not be sufficiently conclusive.”

Certainly, in the instant case, the opinion is not advisory. The interests of both plaintiff and defendants are great. The adjudication would afford specific relief (this is why Travelers is perturbed). All concerned are parties in the action and have appeared in the trial court for the hearing on the motion for declaratory relief. The judgment rendered is conclusive upon the controversy submitted to the court. Of course, it is not conclusive in respect to the entire cause of action — i.e., the operative facts which led to the lawsuit or to matters of negligence or apportionment — but it is conclusive on the issues that are of importance to the parties as revealed by their motion for declaratory relief.

The fact that the release was not executed at the time the motion was brought is irrelevant. What was sought was not an interpretation of an executed release, but an interpretation of the present status of the parties as the result of pre-existing legal writings (insurance policies) and facts that had occurred at the time of the motion. It was the determination of present rights that enabled the parties to chart a future course of action.

The argument that the judgment is advisory exalts form over substance. The court was clearly required under sec. 805.04(2), Stats.,⁴ to approve settlements, releases, and dismissals. The most that could be required, as a matter of form, would be the submission of an executed release subject to being declared void by the court. But this is implicit in sec. 805.04. No finally effective release could have been submitted. Court approval was required. Hence, to require a ritualistic affixing of signatures to a release that required court approval to be effective would be sheer sophistry. When the court of appeals suggests that an executed release ought to have been submitted — when all the proposed signatories were at the hearing — it proposes an entirely unnecessary and meaningless procedure.

The judgment was not advisory.

Borchard is also instructive on the elements of ripeness as a component of justiciability. He points out, page 56, that facts not sufficiently developed — i.e., “when they are so contingent and uncertain” — will justify a court’s refusal to decide. Borchard explains:

“When are the facts contingent? That is not always easy to determine. The Pennsylvania Supreme Court in an exhaustive opinion which has been followed extensively, laid down the rule that the court must be

“ ‘satisfied that an actual controversy, or the ripening seeds of one, exists between parties, all of whom are sui juris and before the court, and that the declaration sought will be a practical help in ending the controversy.’

“By ‘ripening seeds’ the court meant, not that sufficient accrued facts may be dispensed with, but that a dispute may be tried at its inception before it has accumulated the asperity, distemper, animosity, passion, and violence of the full-blown battle which looms ahead. It describes a state of facts indicating ‘imminent’ and ‘inevitable’ litigation, provided the issued is not settled and stabilized by a tranquilizing declaration. The dispute may be determined before the status quo has been altered or disturbed by physical acts of either party.” Borchard, Declaratory Judgments (2d ed.), p. 57.

He further explains:

“Perhaps the principal contribution that the declaratory judgment has made to the philosophy of procedure is to make it clear that a controversy as to legal rights is as fully determinable before as it is after one or the other party has acted on his own view of his rights and perhaps irretrievably shattered the status quo.” P. 58.

Borchard criticizes this court’s reasoning and holding in respect to the element of ripeness set forth in Heller v. Shapiro, 208 Wis. 310, 242 N.W. 174 (1932). The court of appeals recognized Borchard’s criticism of Heller, but felt it was obliged to follow Heller as a precedential decision of this court. Judge Gartzke, writing for the court, discussed the facts in Heller and acknowledged that the plaintiff in that case would undoubtedly have been compelled to pay the first mortgage and that compulsion would have supplied sufficient certainty.

It appears to us that Heller went too far in its requirement that all adjudicatory facts be resolved as a prerequisite to a declaration of rights. The Heller holding and rationale did not further the purposes for which the Declaratory Judgments Act was adopted by the legislature. Heller, if interpreted in accordance with the tenor of its rationale, would erode substantially the authority of a court to declare rights and status, and, if followed to its logical conclusion, would require that all facts at issue, including the ultimate injury or damage to a party, be determinable before declaratory action could be brought. What Heller dictates is a traditional lawsuit after a party is aggrieved. It places undue restraints upon the Declaratory Judgments Act and throttles judicial discretion. We expressly overrule it in respect to the statement therein that:

“[T]he declaratory relief statute [only justifies] a declaration of rights upon an existing state of facts, not one upon a state of facts that may or may not arise in the future.” P. 313.

The vice of this statement, if interpreted literally, is that it deprives the trial judge of the discretion to examine the controversy before him to determine the imminence of the controversy or the ripening of the dispute. As Borchard states:

“The imminence and practical certainty of the act or event in issue, or the intent, capacity, and power to perform, create justiciability as clearly as the completed act or event, and is generally easily distinguishable from remote, contingent, and uncertain events that may never happen . . . .” P, 60.

This is exactly the area in which judicial discretion should be allowed to operate. See Borchard, page 61. In the instant case, the trial judge looked to the facts as presented to him by all of the parties’ affidavits and statements in open court and stated:

“There seems to be little question but that the first three elements exist so that the Court should entertain declaratory relief if the issues are ‘ripe’. In this regard, everything has been done that must be done to liquidate the rights as between the plaintiff Richard Loy, the defendant Ralph Trues dill, and the defendant General Casualty with the issue for determination being only the impact of that action, as a matter of law. Cases are not ‘ripe’ where contingencies remain but under the proposed settlement there are no contingencies as they pertain to insurance'coverage since Travelers ultimate liability remains the same whether there is or is not a settlement. The rationale of ‘ripeness’ is to avoid Courts entangling themselves in abstract disagreements over administrative or legislative policies. Lister v. Board of Regents of University of Wisconsin System (1976) 72 Wis. 2d 282.”

While, as in all discretionary acts of a court, reasonable persons may sometimes differ in the outcome, all that this court need find to sustain a discretionary act is that the trial court examined the relevant facts, applied a proper standard of law, and, using a demonstrated rational process, reached a conclusion that a reasonable judge could reach. See McCleary v. State, 49 Wis. 2d 263, 182 N.W.2d 512 (1971).

It is apparent that the trial judge carefully examined all the facts of record and concluded, in the exercise of reasonable and lawful discretion, that the controversy presented by the motion was justiciable. We sustain that exercise of discretion and reverse the decision of the court of appeals.

In concluding our discussion of the appropriateness of the declaratory judgment procedure in this case, the words of this court in Lister v. Board of Regents, 72 Wis. 2d 282, 307, 240 N.W.2d 610 (1976), are pertinent:

“The underlying philosophy of the Uniform Declaratory Judgments Act is to enable controversies of a jus-ticiable nature to be brought before the courts for settlement and determination prior to the time that a wrong has been threatened or committed. The purpose is facilitated by authorizing a court to take jurisdiction at a point earlier in time than it would do under ordinary remedial rules and procedures. As such, the Act provides a remedy which is primarily anticipatory or preventative in nature.”

Also, the advice of Judge Charles E. Clark in his Horn-book, Code Pleading (West 2d ed. 1947), should be considered in the application of the Declaratory Judgments Act:

“The declaratory judgment should not be considered an extraordinary remedy or an unusual or a strange form of action; it should be considered a simple, ordinary, auxiliary remedy — no more strange than injunction, specific performance, or damages — to be asked for and given whenever it will remove uncertainty in the rights of a litigant or settle a controversy existing or incipient.” (Emphasis supplied.) P. 336.

It is one thing to conclude that the controversy was justiciable and quite another to hold that the ensuing order appropriately decided the rights of the parties. Because the court of appeals found the question posed was not a justiciable controversy, it did not proceed to the second major aspect of the case — the correctness of the trial court’s declaration of rights. The circuit judge in his memorandum opinion correctly capsulized the problem, stating:

“Truesdill and General Casualty want to settle by payment of $20,000.00 to the plaintiff conditioned on plaintiff satisfying any judgment attributable to Truesdill’s negligence in the amount of $50,000.00 (General’s policy limits) and subject further to plaintiff reserving his action against the additional defendants . . . .”

This was accomplished by a release only “for the purpose of perfecting a settlement of the Fifty Thousand Dollars ($50,000.00) policy limits coverage afforded by General Casualty Company to Ralph Truesdill and for no other purpose.” The document expressly reserved any claim which the plaintiff had against Donna Bunderson, State Farm Mutual Automobile Insurance Company, and Travelers. In addition, the plaintiff reserved any claim or cause of action against Truesdill in excess of the $50,-000 policy coverage of General Casualty.

In effect, then, the release as originally submitted to the court preserved a cause of action against Truesdill but discharged the monetary liability only to the extent of $50,000, the coverage of the General Casualty policy. All other rights were reserved, with the additional proviso that the plaintiff would dismiss the pending action against General Casualty and Truesdill, “but not as to Travelers or any obligation they may have by virtue of liability insurance coverage applicable to Ralph Trues-dill’s negligence As a part of this agreement, Loy also agreed never to institute any suit against Trues-dill, General Casualty, or Chambers & Owen.

The effect of this is that General Casualty has discharged in toto the obligation to its insured because, in effect, the plaintiff Loy has been satisfied insofar as Chambers & Owen and Truesdill are concerned as if the $50,000 limit of the General Casualty coverage had been paid. The insureds are exposed to no liability to the plaintiff for any claim falling within the limits of General Casualty’s policy. Moreover, General Casualty has in no way prejudiced the rights of Travelers. The most Travelers could insist upon was that General Casualty, by the payment of its policy limits, would relieve Travelers of any responsibility for payment below $50,000. Because the plaintiff has agreed that the payment made to him by General Casualty will be credited in the amount of $50,000 against any possible recovery against Travelers, Travelers has received the benefit of its policy provision and is only exposed to liability for sums in excess of the policy limits of the primary carrier. As the trial judge succinctly stated in his opinion:

“Travelers will not be called upon to pay any loss that General Casualty might have paid if the plaintiff is successful in the trial.”

We note in passing to what we have alluded to before — that, under the state of this record, where the insured did not purchase two insurance policies, one primary and one excess, Travelers is not in fact an excess insurer which had the opportunity, consciously, to adjust its premium rates on the basis that there was an underlying policy purchased by the same insured.

Here, the fact that there were two policies, one Trues-dill’s and the other Chambers & Owen’s is sheer coincidence. Looking at Travelers’ policy alone, it had the contractual duty to defend ab initio and to pay from “dollar-one.” The fact of the matter is that Travelers is not aggrieved. It is benefited by a fortuitous coincidence; and it clearly has the duty to continue with the defense for the potential liability reserved, that which falls between the policy limits of General Casualty and the policy limits in excess of Travelers’ $500,000 coverage. The relief afforded by the settlement benefits Travelers in still another respect, because it obviates any possibility of a verdict in excess of Travelers’ policy limits and saves Travelers from a possible claim of bad faith by any insured. It cannot, under the release, be liable for more than it contracted to pay.

Thus, we see no fundamental unfairness in this agreement. General Casualty has discharged its duty under its policy and has a right to be exonerated from further liability. It has satisfied the claim of the plaintiff to the extent of its policy limits. Its insured Truesdill is not exposed to any excess liability by any conduct of General Casualty.

Travelers, however, makes an attack on the very basis of this arrangement. It contends that its insurance policy is one of indemnity only and that, hence, the discharge of all the liabilities of Truesdill and Chambers & Owen relieve it of any obligation whatsoever under its policy. We conclude that this assertion is incorrect for two reasons, (1) that it is clear from the face of the release that the document is primarily a covenant not to sue, and (2) even if construed as a release, under Wisconsin law an automobile accident policy is required to be one of liability and not merely of indemnification. The agreement which is denominated a “special release” is an absolute release of Truesdill and Chambers & Owen only for the liability below $50,000 and in excess of $500,000. It would be inconsistent for Travelers to assert any concern over these released items when they absolutely disavow either an obligation to defend or an obligation to pay in respect to damages within primary policy limits or in excess of its own limits.

In respect to the area of exposure falling within the policy of Travelers, no absolute release is granted. ■ Ralph Truesdill is dismissed from the action, and there is a covenant not to sue Ralph Truesdill or Chambers & Owen. This is not a release. It constitutes, in respect to the area of Travelers’ exposure, a covenant not to sue.

Admittedly, there is some ambiguity, but it is clear from the language of the agreement that the clearly understood intent of all the parties to the hearing and to the declaratory judgment proceedings was to reserve the action against Travelers while abandoning it against other defendants. This court has ratified this procedure. We have followed the precept of Prosser, Law of Torts (hornbook series, 4th ed. 1971), sec. 49, p. 304, wherein he said that:

"... a plaintiff should never be compelled to surrender his cause of action against any wrongdoer unless he has intentionally done so, or unless he has received such full compensation that he is no longer entitled to maintain it.”

In both Brown v. Hammermill Paper Co., 88 Wis. 2d 224, 237, 276 NW2d 709 (1979), and Swanigan v. State Farm Ins. Co., 99 Wis. 2d 179, 202, 299 NW2d 234 (1980), we have followed the guideline of Prosser in that we concluded that a plaintiff, if it be his intent, may discharge one defendant to a tort action without discharging another. Swanigan is particularly instructive in that it involved the liability of an adult sponsor, a parent, for the negligence of a child. We stated that the effect of that statute, sec. 343.15(2), is to impose financial responsibility on the adult sponsor of a minor driver. In that case, the minor had been released, but we held that the release of the minor did not release the sponsor, who, under the circumstances, was in the position of an initial insurer of the minor’s negligence.

In the Brown case, we specifically relied upon the ruling of Krenz v. Medical Protective Co., 57 Wis. 2d 387, 204 NW2d 663 (1973), for the proposition that an injured party should not be compelled to surrender a claim for relief unless that injured party has intentionally done so or unless there has been full compensation. Accordingly, even in a release situation, the intent of the parties in an ordinary tort case should be controlling. But we reiterate, there was no release of any liability for the negligence of Travelers’ insured to the extent that it was covered by the Travelers’ policy. There was merely a covenant not to sue. Even in a contract situation, Williston, 10 Contracts, sec. 1230, p. 738, states that:

“Whether the creditor releases the principal or grants him an extension of time, an express reservation will preserve his claim against the surety.”

66 Am. Jur. 2d, Release, sec. 2, p. 679, summarizes the distinction between a covenant not to sue and a release. It states:

“A covenant not to sue is to be distinguished from a release in that it is not a present abandonment or relinquishment of the right or claim but is merely an agreement not to sue on an existing claim. It does not extinguish the cause of action. As between the parties to the agreement, the final result is the same in both cases. The difference is primarily in the effect as to third parties, and is based mainly on the fact that in the case of a release there is an immediate release or discharge, whereas in the other case there is merely an agreement not to prosecute a suit. A covenant not to sue is nothing but a contract, and should be so construed.”

We therefore conclude, looking at the documents themselves, the release and the motions of record which are before us, that it was the clear intent, with respect to the areas of Travelers’ exposure, to enter into a covenant not to sue. As we have stated, however, despite what we deem to be the overwhelming clarity of the intent of the parties, the word, “release,” nevertheless is used in the documents. Assuming, then, that there has been a release of the insureds, Truesdill and Chambers & Owen, is the insurer relieved of liability ? It is not.

Wisconsin, unlike many states, has a direct action statute. Sec. 632.24, Stats., states:

“632.24 Direct action against insurer. Any bond or policy of insurance covering liability to others for negligence makes the insurer liable, up to the amounts stated in the bond or policy, to the persons entitled to recover against the insured for the death of any person or for injury to persons or property, irrespective of whether the liability is presently established or is contingent and to become fixed or certain by final judgment against the insured.”

It is important to note that the liability is upon the insurer irrespective of whether there is a final judgment against the insured. It has long been established that, under this language, an insured is not a necessary party. The question posed in this case, however, is whether, assuming an absolute release of the insured after the commencement of the lawsuit, the insurance company nevertheless, under the direct action statute, remains potentially liable for damages to a party who sustained injuries as the consequence of an insured’s negligence.

A number of the cases cited in the Travelers’ brief arguably could lead to the conclusion that the only obligation of an insurance company is to indemnify its own insured. This proposition, of course, flies in the teeth of the express language of the statute. The insurance company has a direct liability to an injured party if other factors trigger insurance company liability. And the fact that the insured is not a necessary party proves beyond doubt that indemnification does not discharge an insurance company’s obligation under the statute. The cases cited by Travelers generally are those in which there is no underlying liability whatsoever. Obviously, it is the nature of the insured’s conduct and its consequences with which an insurance company is concerned. If there is no liability ab initio or there can be no liability, there is no responsibility under the contract. To use the words of Wiechmann v. Huber, 211 Wis. 333, 336, 248 N.W. 112 (1933):

“It is quite impossible to read into the statutes an intent to create a liability on the part of the insurance carrier completely dissociated from the liability of the insured.” (Emphasis supplied.)

But nothing in any of the Wisconsin cases leads to the conclusion that, where an insured has performed a negligent act and the insurance company would otherwise be liable, the discharge or release of the immediate tort-feasor discharges the insurer.

We agree with Travelers’ statement which appears in its brief. Travelers, after reciting that it acknowledges that an action may be brought directly without naming the insured and after acknowledging that a plaintiff may proceed with an action even though the statute of limitations has run against the insured, relies upon the general statement in Nichols v. United States Fidelity & Guaranty Co., 13 Wis. 2d 491, 499, 109 N.W.2d 131 (1961):

“The fact that a third party can sue an insurer of a motor vehicle direct. , . without first recovering a judgment against the insured defendant, does not enlarge the coverage afforded by such policy or determine the insurer’s liability thereunder. The third party can only recover from the insurer by virtue of the contract existing between it and its insured . . .

That statement is absolutely correct, but it demonstrates that the judgment may be directly against the insurer and that payment must be made directly to the injured party. This is not indemnification, since the insured has in fact paid nothing. It is direct liability to the injured party. Nor does that enlarge coverage or in any way abrogate the terms of the contract. The coverage is what the policy says it shall be, and only if the contract permits recovery for the conduct of the insured can there be a recovery against the insurance company. But the statutes are a part of the contract as a matter of law, and it is clear that the insurer is directly liable under the statute.

As long ago as 1941, Justice Wickhem discussed the relationship of indemnity clauses in insurance policies and contrasted the Wisconsin law with those states in which automobile insurers are permitted to write policies which are only those of indemnity. Justice Wickhem in New Amsterdam Casualty Co. v. Simpson, 238 Wis. 550, 554-55, 300 N.W. 367 (1941), write:

“This is not true in Wisconsin. Under sec. 85.93, Stats., the insurance company is made directly liable to the injured party. . . . Hence, the injured party with a cause of action directly against the insurer is in a real, as well as a technical sense, the principal adversary of the insurance company .... This [is] quite different from the case of the ordinary indemnity . . . policy where the injured party merely resorts to the policy as an asset of the insured.”

Other states have made explicit what is only implicit in Wisconsin. For example, in Futch v. Fidelity & Casualty Co. of New York (Ct. App. La. 1961), 136 So. 2d 724, affd 246 La. 688, 166 So. 2d 274 (1974), the Louisiana Court of Appeals, under a Louisiana direct action statute, held that a release given by a claimant upon a settlement with a primary insurer reserving the right against the excess insurer did not preclude further recovery against the excess insurer although the release stated that the insured was fully released. See also Benroth v. Continental Casualty Co., 132 F. Supp. 270 (US DC La., 1955).

The most persuasive case, however, is Christina Deblon v. Leslie Beaton and Jersey Ins. Co., 103 N.J. Super. 345, 247 A. 2d 172 (1968), quoted with approval by 7C Appleman, Insurance Law and Practice, sec. 4714, pp. 536-37, for the proposition that a release given by plaintiff upon settlement with the primary liability insurer without prejudice to the rights against an excess insurer does not preclude further recovery against the excess insurer. The excess insurer in that case argued, as does Travelers in this case, that its policy was simply one of indemnity and, accordingly, it had no responsibility in either a situation where there was an absolute release of the insured or a covenant not to sue. However, the court stated that, under the law of New Jersey, the public policy which has been engrafted into statutes is one:

“. . . favoring the availability to injured persons of the liability insurance of those whose negligence is the cause of their plight. . . . Furthermore, upon the happening of an accident an injured party acquires an interest in an insurance policy which may be available . . . , and that construction of such policy should be adopted which will afford the widest possible coverage. . . . Accordingly, the policy clause, ‘legally obligated to pay,’ cannot receive the narrow construction sought by Jersey, grounded as it is in the rather metaphysical approach that the covenant not to sue released Jersey’s insured in toto, despite its clear intention not to do so. All that is required is a jury verdict of negligence and damages in excess of the primary coverage . . . .” P. 175.

It is notable that in this New Jersey case, as in the one before this court, the primary insurer settled with the claimant for less than its primary coverage limits. The New Jersey court also found that, although the intent was clearly that of a covenant not to sue, the result would be the same had the insured been given a general release. After reaching this conclusion, the court went on to point out that settlements of this nature are to be encouraged and that the public interest requires that a plaintiff be permitted to settle claims against some of the exposed parties without releasing others. The court said:

“The interest of a plaintiff is full compensation, and from his viewpoint it makes no difference whether a recovery is paid by a tortfeasor, his primary insurance carrier, his excess carrier, or any combination of the three.” P. 175.

The court pointed out the responsibility of an excess carrier to the insured and stated:

“Since a carrier has a duty to act in good faith where its interests conflict with those of the insured in connection with settlement negotiations, it certainly cannot complain about the partial settlement [with the primary insurer],. . . after . . . refusing to negotiate at all. The law . . . favors settlements . . . and the partial settlement achieved in this case does not prejudice Jersey. As a matter of fact, it aids Jersey in the sense that the release of the individual defendants as to their personal assets will preclude any exposure of Jersey to liability beyond its policy limit . . . .” P. 176.

The New Jersey court also addressed another point argued by Travelers in the instant case, that is, that permitting plaintiff to settle with the individual defendants and the primary insurer without release of the excess insurer would encourage collusion. The New Jersey court answered this contention by stating that:

“[I]nsurers can always rely on the required ‘cooperation’ clauses of their liability policies .... The fact is . . . that the primary liability insurer, to effect a saving on its policy limits, has settled with plaintiff, and such carrier could not settle its exposure without obtaining a release as to its assureds’ personal assets. No obligation runs from the primary carrier to the excess carrier, nor is the latter prejudiced by the partial release in favor of the paying carrier and the concomitant release of the insured. This accords with the modern view that the legal effect of a release on strangers thereto should be determined by the intent of the parties to the release and the extent of compensation paid to the releasor rather than upon outmoded concepts of ancient times.” P. 176.

We accept the rationale of the New Jersey court. It comports fully with the purpose of the direct action provisions of the Wisconsin statutes. An insurer is directly liable to the plaintiff if the underlying conditions of negligence are satisfied although, after commencement of the action, the insured is released or protected by an absolute covenant not to sue. The responsibility of an insurance company to an injured party is derivative of the insured’s conduct, but it is not derivative of the status of the insured’s personal liability to a plaintiff at the time the insurer’s contractual obligations are triggered by a judgment for damages.

The circuit court also ruled that Travelers could not pursue a bad faith cause of action against General Casualty as the result of the settlement in this case. Travelers asserts that it has a cause of action against General Casualty for the expenses incurred in contesting General Casualty’s “bad faith” in negotiating and entering into the settlement, for abandoning the defense of the allegations of causal negligence on the part of Truesdill before making full payment of the policy limits, and for bad faith failure to settle within the primary limits, thus exposing Travelers to the potential of an excess judgment. We think it clear that the trial court ruled correctly in barring those causes of action asserted by Travelers against General Casualty.

In respect, first, to the claim that Travelers has the right of recovery over for future expenses that may be incurred in the defense of its liability, it is clear that, by the provisions of Travelers’ own policy, that it had the right and duty to defend the lawsuit. This is an obligation that it contracted for and is entirely independent of any obligation that General Casualty had to defend under its separate policy. But there was no contract between General Casualty and Travelers that imposed any obligation on General Casualty to defend claims that arose, or might arise after it settled out, within the parameters of Travelers’ coverage.

A similar claim was posed in United States Fidelity and Guaranty Co. v. Tri-State Ins. Co., 285 F. 2d 579 (10th Cir. 1960). Therein, United States Fidelity and Guaranty Co. claimed that it had the right to recover for its defense costs against Tri-State, the primary insurer. In denying this claim, the United States Court of Appeals, after pointing out that there was no contractual relationship between the primary and excess insurer, said:

“U.S.F. & G. also had a policy obligation to defend . . . and this obligation . . . was a primary obligation co-existent with that of Tri-State. The agreement to furnish such service, several with the two companies, is distinct from and in addition to the insuring agreement pertaining to liability. The question here thus narrows to whether contribution will lie between two insurance companies when each has a policy containing a defense agreement. The question has been answered in the negative, and we believe properly so, in a number of cases. The duty to defend is personal to each insurer. The obligation is several and the carrier is not entitled to divide the duty nor require contribution from another absent a specific contractual right.” P. 582.

The circuit court in the instant case appropriately held that Travelers Insurance Company has the obligation to defend the allegations of causal negligence against Trues-dill.

The other claims of Travelers decided adversely to it by the circuit court are controlled by the facts of this case, and those facts distinguish the situation here from all the cases relied upon by Travelers in its assertion of a cause of action for bad faith against General Casualty. In all cases relied upon, the insured, because of the misconduct of the primary insurer, was exposed to liability not only for excess coverage but also to liability within the range of the primary insurer’s obligation. Bad faith can only arise where an insurer has committed the tort against its own insured. Here the insureds were protected from any liability whatsoever.

In the recent case of Kranzush v. Badger State Mutual Casualty Co., 103 Wis. 2d 56, 63, 307 N.W. 2d 256 (1981), we said:

“[I]t is clear that this excess liability bad-faith tort is a vehicle to enforce the insurer’s duty to be mindful of the insured’s interests when settling third-party claims.” (Emphasis supplied)

In the same opinion, page 73, we stated:

“The insurer’s duty of good faith and fair dealing arises from the insurance contract and runs to the insured.” (Emphasis supplied)

These statements in Kranzush are consistent with earlier decisions of this court which have discussed the nature of the tort of bad faith in an insurance context. Alt v. American Family Mutual Ins. Co., 71 Wis. 2d 340, 237 N.W.2d 706 (1976); Johnson v. American Family Mutual Ins. Co., 93 Wis. 2d 633, 287 N.W.2d 729 (1980).

Because there is no contract between General Casualty and Travelers, the tort of bad faith cannot arise between them on any theory heretofore approved by this court.

The trial judge in his memorandum opinion found, as a matter of fact, that the insured will suffer no loss because the plaintiff will discharge him from the lawsuit. Moreover, the judge found that Travelers, under the release, would not be called upon to pay any loss that General Casualty could have been responsible for in a trial. This is, of course, because the entire primary liability of General Casualty has been satisfied by the plaintiff. The insured, because he is fully discharged of any liability to plaintiff, will have no cause of action against either General Casualty or Travelers, and the only expenses which can be incurred by Travelers are those that it has specifically contracted for — the cost of defense and the obligation to pay if found liable under its policy.

In the instant case, General Casualty fully discharged its duty to its own insured. It settled the claim of the plaintiff as against it within the policy limits and, by its negotiations with the claimant, guaranteed the protection of the insured from any possibility of personal liability for a claim in excess of General Casualty’s limits. It also afforded Travelers the maximum protection consistent with General Casualty’s obligation and consistent with the “other insurance” provisions of Travelers’ policy. By its settlement it protected Travelers from any possibility of liability up to $50,000. This is the most that General Casualty was obligated to do, and it is all that Travelers’ “other insurance” provision can require. As pointed out above, Travelers has been benefited by this settlement.

All that remains is for Travelers to perform the obligation under its own policy for which it has been paid a premium which it considered appropriate at the time it made its contract with Chambers & Owen. General Casualty’s duties have been fully performed in a manner that protected its insured and Travelers. Travelers has yet to perform its contractual duties; and because it has contracted to defend and to pay any possible liability these are obligations which it alone must bear.

The cases upon which Travelers places the most reliance make it clear that the excess insurer’s possibility of a claim against a primary insurer can arise only where the insured has been abandoned by the primary carrier. See, Peter v. Travelers Insurance Co., 375 F. Supp. 1347 (US DC CD Calif. 1974), and Continental Casualty Co. v. Reserve Ins. Co., 238 N.W.2d 862 (Minn. 1976). The latter casé stated:

“We hold that an excess insurer is subrogated to the insured’s rights against a primary insurer for breach of the primary insurer’s good-faith duty to settle.” P. 864.

Accordingly, it appears that the very authorities relied upon by Travelers predicate the excess insurer’s right to recover on the ground that the insured has been damaged by the conduct of the primary insurer. This simply has not happened under the facts here.

An excellent article by Dennis J. Wall, Bad Faith, Excess Liability Actions by or Against Excess Insurers, appears in Insurance Counsel Journal, April 1981, p. 311. In summarizing the discussion, the author states that a bad faith suit against a primary insurer may be based only on two possible grounds:

“Either the excess insurer has taken an assignment of the insured’s rights, or the excess insurer has paid the excess liability and sues as the insured’s equitable as-signee or subrogee. In either case, all the excess insurer may assert is the rights of the insured.” (Emphasis supplied) P. 324.

The author of the article concludes that none of the theories on which courts have allowed recoveries by an excess insurer against a primary carrier are satisfactorily explained on the basis of accepted legal doctrine. He suggests:

“If excess carriers wish to attempt to condition their liability for excess payments on the primary insurer’s good faith, then they should be made to make that attempt by spelling that condition out in plain English in their contracts.” P. 324.

As we have pointed out before, too often the insurance companies come to the courts asking that the courts supply the lacunae in their contracts. Certainly, when the dispute concerns legal rights and obligations as between insurance companies, it is not too much to ask that they make specific provisions, either in their contracts or by treaties of understanding between themselves. See Schoenecker v. Haines, 88 Wis. 2d 665, 674-75, 277 N.W.2d 782 (1979).

Accordingly, we conclude that the court of appeals erred when it reversed the circuit court order holding that the controversy was justiciable, and we affirm in its totality the order of the circuit court declaring the rights and status of the parties.

By the Court. — Decision of the court of appeals reversed ; order of the circuit court affirmed.

Ceci, J., took no part.

1 Loy v. Bunderson, 101 Wis. 2d 215, 304 N.W.2d 140 (Ct. App. 1981).

2 Apparently, separate settlement has been made with State Farm — at least no issue in regard to its liability is raised in these proceedings.

3 The release as finally executed was substantially the same. It differs in that the dismissal of General Casualty and Trues-dill as defendants in Loy’s suit was to be with prejudice; and in the event the court approval of the release were reversed on appeal so as to expose Truesdill or General Casualty to liability to the plaintiff, Travelers, Chambers & Owen, the plaintiff would release General Casualty, Travelers, Truesdill, and Chambers & Owen. Those portions of the “special release” which are more appropriately viewed as covenants not to sue will be discussed infra,

4 “805.04 ... (2) By ORDER op Court. Except as provided in sub. (1), an action shall not be dismissed at the plaintiff’s instance save upon order of court and upon such terms and conditions as the court deems proper. . . .”