United States Fire Insurance v. Chrysler Motors Corp.

505 P.2d 1137, 264 Or. 362, 1973 Ore. LEXIS 471

• Court: Oregon Supreme Court
• Decided: February 1, 1973
• Status: Published

Opinions

McALLISTER, J.

■ Jeanette Berger and her husband purchased a Chrysler automobile from Westway Chrysler-Plymouth, Inc. The automobile had been sold to Westway by the defendant, Chrysler Motors Corp. Mrs. Berger filed an action for damages for personal injuries against Westway and Chrysler alleging that while driving the automobile she was involved in a head-on collision and that as a result of a defect in the automobile she suffered extensive personal injuries. She alleged that the automobile was defective because, upon impact, the front seat left its track and pinned her beneath the steering wheel and the dashboard. The complaint was in three counts, proceeding on theories of breach of warranty, strict liability for sale of a defective product, and negligence on the part of both Chrysler and Westway in the following particulars: “(1) In failing to design and construct the front seat of said automobile in its track of proper materials so that it would not become disengaged as so above alleged. (2) In failing to warn of the dangers inherent in the use of the automobile as herein alleged. (3) In failing to properly test the front seat and its track so that it would withstand the impact above alleged.” She prayed for $2,235.20 in special damages and $50,000 general damages.

Westway and its liability insurer U. S. Fire Insurance Co. tendered the defense of the Berger action to Chrysler. The tender was declined and U. S. Fire undertook the defense on behalf of its insured. Mrs. Berger later filed a second amended complaint, omitting the warranty count and proceeding only on the theories of strict liability and negligence. IT. S. Fire again tendered the defense of the action to Chrysler and Chrysler again declined the tender. U. S. Fire then continued with the defense of the action.

Chrysler settled Mrs. Berger’s action before trial, paying $1,250 and received a release of both Westway and Chrysler. The release recited that West-way and Chrysler both expressly denied liability for damages arising out of Mrs. Berger’s accident.

In this action U. S. Fire as Westway’s subrogee claims the right to be indemnified by Chrysler for $1,995.90 incurred in defense of the Berger action which the parties have stipulated was a reasonable amount for defending the action prior to settlement. In a trial without a jury the court overruled a demurrer to plaintiff’s complaint, denied Chrysler’s motion made at the close of plaintiff’s case for a “peremptory finding in favor of defendant” and rendered judgment for plaintiff. Chrysler appealed.

The issue is whether Chrysler is obligated to reimburse U. S. Fire for its expenses in defending Westway in the damage action brought by Mrs. Berger merely because the allegations of Mrs. Berger’s complaint were such that the proof might have shown that Chrysler was primarily liable and Westway secondarily liable for Mrs. Berger’s injuries. It should be borne in mind that U. S. Fire stands in Westway’s shoes and is entitled to recover only if Westway could have recovered from Chrysler.

Chrysler contends that U. S. Fire cannot recover because it neither pleaded nor proved the elements of an action for common-law indemnity as summarized in Restatement, Restitution, § 76:

“A person who, in whole or in part, has discharged a duty which is owed by him but which as between himself and another should have been discharged by the other, is entitled to indemnity from the other, unless the payor is barred by the wrongful nature of his conduct.”

Our cases have consistently applied these principles, and have required the claimant in an indemnity action to show that he has discharged a legal obligation to a third party to whom the indemnitor was also obligated, and that as between the two the indemnitor ought to have discharged the obligation.

① As applied to this case the rule means simply that U. S. Fire can recover only by pleading and proving that both West-way and Chrysler were liable to Mrs. Berger and that, as between Chrysler and Westway, Chrysler ought to pay.

It is axiomatic that if the facts necessary to create a common law right to indemnity were not established in Mrs. Berger’s action they must be pleaded and proved in this action. Fulton Ins. Co. v. White Motor Corp., 261 Or 206, 212, 493 P2d 138, 141 (1972). It is obvious that no common law right to indemnity was established in Mrs. Berger’s case because it was settled without trial. It is equally obvious that U. S. Fire has failed to prove in this case the essential elements of an action for indemnity as against Chrysler and made no attempt to do so.

This brings us to U. S. Fire’s only contention, that because Mrs. Berger’s complaint contained allegations which, if proved, could have established primary liability as to Chrysler and secondary liability as to Westway, Chrysler has a duty to defend the action. If this contention were accepted it would place on manufacturers the duty to defend virtually all products liability actions brought against their dealers, whether or not those actions were well-founded. It would also create a non-eontractual duty to defend in a variety of other situations involving potential indemnity claims. In support of this theory and of the trial court’s judgment plaintiff relies on Ferguson v. Birmingham Fire Ins. Co., 254 Or 496, 460 P2d 342 (1969) and St. Paul Fire & Marine Insurance Co. v. Crosetti Bros., Inc., 256 Or 576, 475 P2d 69 (1970). The short answer to plaintiff’s contention is that neither of those cases was a common law indemnity ease, but both involved express agreements which expressly imposed upon the indemnitor the duty to defend.

Ferguson was an action on a liability insurance policy, which provided that the insurer would defend

“* * * any suit against the insured alleging such bodily injury or property damage and seeking damages which are payable under the terms of this endorsement, even if any of the allegations of the suit are groundless, false or fraudulent; * * 254 Or at 499.

Tinder the terms of that agreement the court held that the insurer had a duty to defend an action against the insured even though the complaint alleged conduct which was not covered by the policy, if the complaint would, without amendment; also support recovery for conduct which was covered by the policy.

In St. Paul Fire & Marine v. Crosetti Bros. this principle was applied to a defendant, Crosetti Bros., who was not an insurance company, but who had agreed to “indemnify and save harmless” the Port of Portland “from all fines, suits, claims, demands and actions of any kind and nature” arising out of Crosetti Bros.’ operations. The court held that if the third party’s complaint alleged facts which would allow recovery for conduct covered by the indemnity agreement, Crosetti Bros, had a duty to defend the action or pay the costs of defense. It also held that Crosetti Bros, was liable for the defense costs, even though the defense had been successful and the Port of Portland had not had to pay any damages.

In the present case U. S. Fire relies on the following overbroad statement made in Crosetti:

“The rule in most jurisdictions, regardless of whether indemnity is based upon an implied or an express agreement, is that when a claim is made against an indemnitee for which he is entitled to indemnification, the indemnitor is liable for any reasonable expenses incurred by the indemnitee in defending against such claim, regardless of whether the indemnitee is ultimately held not liable. * * *” 256 Or at 579.

The above statement is not applicable in this case for two reasons. By its terms the statement applies only to claims against an indemnitee for which he is entitled to indemnification. It has never been established in this case that Westway is entitled to indemnity from Chrysler. In the Crosetti case St. Paul had shown that its insured, the Port of Portland, was entitled to indemnity under the terms of an agreement which required Crosetti to indemnify and save the Port of Portland harmless from all “claims, demands and actions.” The complaint against the Port of Portland contained allegations which, if true, would make Crosetti primarily liable to the injured party. Crosetti, therefore, owed Port of Portland a defense under the terms of their express contract. An agreement to “hold harmless” is generally held to include an obligation to defend, or to reimburse for the costs of defense, when an action within the terms of the agreement is filed against the indemnitee. New York Central Railroad Co. v. General Motors Corp., 182 FS 273, 291 (ND Ohio 1960); Winchester Repeating Arms Co. v. U.S., 51 Ct Cl 118 (1916).

Neither Crosetti nor the cases cited in support of the statement quoted above hold that the mere unproved allegations of a third party establish a right to a defense of those allegations in the absence of an agreement to defend all claims or to hold the indemnitee harmless.

Miller and Company of Birmingham v. Louisville & N. R. Co., 328 F2d 73 (5th Cir 1964), cert denied 377 US 966, 84 S Ct 1648, 12 L Ed 2d 737, and Commercial Standard v. Cleveland, 86 Ariz 288, 345 P2d 210 (1959) both involved express “hold harmless” agreements. Commercial Standard recognized the duty of the indemnitor, under the terms of the agreement, to provide defense services or to pay the costs of a successful defense. The Miller and Company case recognizes the duty to reimburse for defense costs only in the event of a judgment against the indemnitee.

Southern Arizona York Refrigeration Co. v. Bush Mfg. Co., 331 F2d 1 (9th Cir 1964) was a common-law indemnity case in which a judgment had been recovered against the indemnitee, who then sued to require the indemnitor to reimburse it for the amount paid to satisfy the judgment and for costs and attorney fees. The court held only that if the plaintiff established its right to indemnity it was entitled to recover its costs, including attorney fees, incurred in defending the third party action. In O’Connell v. Jackson, 273 Minn 91, 140 NW2d 65 (1966) it is not clear whether the court regarded the action as one for common-law indemnity or as an action for damages under Restatement, Torts, § 914, which authorizes recovery for costs incurred in litigation made necessary by the tortious act or breach of duty of another. In any event, the case holds no more than that a plaintiff who has established his right to reimbursement for a judgment may also recover his defense costs. Neither O’Connell v. Jackson nor Southern Arizona York Refrigeration Co. v. Bush Mfg. Co. involved the right to recover defense costs when liability had not been established.

The dissent relies on Paliaga v. Luckenbach Steamship Company, 301 F2d 403 (2d Cir 1962), also cited in Crosetti, as holding that under parallel facts, including a settlement by the indemnitor, the indemnitee is entitled to recover its defense costs without a showing of liability to the injured third party. We do not read Paliaga, however, as dispensing with the need for a showing that the costs were incurred on account of some wrongful act on the part of the indemnitor. The case was decided on the basis of the stevedore’s duty under maritime law to indemnify a shipowner for claims arising out of the stevedore’s operations, a duty which the law implies as arising out of the contract for services even in the absence of an express indemnity agreement. The stevedore, who had been impleaded by the defendant shipowner, settled the action by an injured longshoreman while the jury was deliberating. The trial court denied the shipowner’s motion to continue with the trial of the indemnity issues and determine the shipowner’s right to recover defense costs. On appeal the denial of this motion was held to be an abuse of discretion. The holding was not that the shipowner 'was entitled to recover defense costs, but that it was entitled to have that question determined in the same proceedings. The question whether the stevedore had breached his duty to the shipowner, and was therefore responsible for the shipowner’s costs of litigation, was still to be determined in the trial court. The court on appeal said that the stevedore’s obligation was to “indemnify the shipowner for any loss incurred by the shipowner caused by the stevedore’s failure to use proper care.” 301 F2d at 410.

The Crosetti case does not stand for the proposition that, absent an express agreement, plaintiff had a right to be indemnified for its defense costs upon the mere showing that the third party’s complaint alleged facts under which Westway might have been entitled to indemnity, nor does Paliaga or any of the other cases cited in Grosetti. Plaintiff has cited no authority which does stand for that proposition, and we have found none.

The Uniform Commercial Code makes some provision for the rights of buyers against sellers under these circumstances, but does not establish any right to recover defense costs. ORS 72.6070 (5) provides:

“Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over:

“(a) He may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact common to the two litigations, then unless the seller after seasonable receipt of the notice does come in and defend he is so bound.”

This section makes no change in the law requiring proof of the facts establishing a right of indemnity, and obviously contemplates no duty to defend in advance of such proof.

There are circumstances under which defense costs may be recovered from another party without resort to the special rules of indemnity. As summarized in McCormick on Damages 246:

“* * * where the present defendant has by his wrongful conduct, be it tort or breach of contract, caused the present plaintiff to defend or prosecute previous legal proceedings, the law * * * allows the plaintiff to recover all the expense, including counsel fees, reasonably incurred by him in the prior litigation.”

The author specifically recognizes that a seller’s breach of warranty of quality may entitle the purchaser to recover costs of litigation. Id. at 250. The rule is adopted in the Restatement of Torts, § 914:

“A person who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover compensation for the reasonably necessary loss of time, attorney fees and other expenditures thereby suffered or incurred.”

and also in the Restatement of Contracts, § 334:

“If a breach of contract is the cause of litigation between the plaintiff and third parties that the defendant had reason to foresee when the contract was made, the plaintiff’s reasonable expenditures in such litigation are included in estimating Ms damages.”

See, also, 25 CJS 787-788, Damages § 50 e. This ground of recovery was recognized in Huffstutter v. Lind, 250 Or 295, 301, 442 P2d 227 (1968). In such a case, however, the plaintiff must allege and prove that his expenses were caused by defendant’s wrongful conduct.

We have found no authority which would permit Westway to recover its defense costs without at least a showing that some act or breach of duty by Chrysler was the cause of the litigation and thus of the costs incurred in Westway’s defense. In the present case, plaintiff has not proved either its right to common-law indemnity or that its involvement in the Berger litigation was caused by any breach of duty by defendant. Plaintiff has not proved that the car was, in fact, defective as Mrs. Berger alleged, or that if there was a defect it was one for which defendant was responsible. Plaintiff’s evidence is insufficient to support recovery on any theory, and the judgment of the trial court must be reversed.

It is so ordered.

Citizens Ins. Co. v. Signal Ins. Co., 261 Or 294, 298, 493 P2d 46 (1972); Owings v. Rose, 262 Or 247, 497 P2d 1183 (1972); Fulton Ins. Co. v. White Motor Corp., 261 Or 206, 210, 493 P2d, 138 (1972); General Ins. Co. v. P. S. Lord, 258 Or 332, 335-336, 482 P2d 709 (1971); Astoria v. Astoria & Columbia River R. Co., 67 Or 538, 548-549, 136 P 645 (1913). In Kennedy v. Colt, 216 Or 647, 339 P2d 450 (1959) the opinion does not discuss the indemnitor’s legal liability to the third party. It does, however, clearly require at least a showing that the indemnitor' was primarily responsible for the injury. 216 Or at 653-654.