Campbell v. Allstate Insurance

ALPERT, Judge. This is an appeal from the dismissal of an Amended Complaint For Breach of Contract filed by Robert Campbell, appellant, against his automobile insurer, Allstate Insurance Company, Inc., appellee (hereinafter “Allstate”). The Amended Complaint alleged that Allstate had breached its contractual obligation either to defend, or settle within policy limits, an action brought against appellant by the injured driver of a car with whom appellant had collided. Although the injured driver offered to settle the underlying suit for the policy limits of $20,000.00, Allstate refused the offer — and it was later withdrawn. ²⁸⁰ Shortly thereafter, legal counsel appointed by Allstate advised appellant to retain “excess counsel” in order to protect his interests outside of the policy limits of the policy.

Appellant, indeed, followed that advice. Appellant’s excess counsel then wrote Allstate suggesting that it either defend or settle the case in order to protect appellant from excess liability. Allstate again refused to settle. Accordingly, appellant then filed a Complaint for Declaratory Relief (hereinafter the “Complaint”) alleging that Allstate failed to act in good faith, thereby inducing appellant to secure independent counsel.

Appellant also requested in the Complaint that Allstate be ordered to pay for (1) the costs and fees related to his defense in the underlying action, and (2) the costs and counsel fees associated with filing the Complaint for Declaratory Relief. Allstate ultimately settled the underlying suit for the policy limits just before trial. Appellant then filed an Amended Complaint for Breach of Contract to recover the counsel fees incurred in having to engage “excess counsel.” Allstate subsequently filed a Motion to Dismiss the Amended Complaint. The Circuit Court for Montgomery County granted the Motion, finding that no contract cause of action existed.

From this holding, appellant filed a timely appeal and asked us to resolve the following single issue: Where there is an offer to settle an insurance claim within the limits of the policy, the attorney hired by the insurance company opines to the carrier that the case could exceed policy limits, the insurance company refuses to settle within the policy limits, the insurance company refuses to provide the legal defense recommended by their appointee, the attorney advises the insured to obtain excess counsel, the insured obtains excess counsel and incurs legal fees, whether the insured has a contractual right to this independent counsel at the expense of the insurer? 1 ²⁸¹ I. In order to provide a sufficient background of the circumstances under which appellant’s Complaint (and subsequent Amended Complaint) arose, we deem it appropriate to recount briefly the events surrounding the underlying suit. On August 9, 1990, while driving in Montgomery County, Maryland, Campbell was involved in a two car collision with Kimberly Baptiste which collision was the fault of appellant. Ms. Baptiste sustained injuries in the accident and sued Campbell for those injuries in the underlying case known as Baptiste v. Campbell, Case No. 69363, filed in the Circuit Court for Montgomery County, Maryland. Liability was not an issue in the case.

At the time of the accident, appellant was insured under an automobile insurance policy with Allstate, which policy contained limits for personal injury protection of $20,000.00. There was no question that appellant’s premium under said policy was paid in full. Part 1 of the policy entitled AUTOMOBILE LIABILITY INSURANCE BODILY INJURY-COVERAGE AA provided for the following coverage: We will defend an insured person sued as the result of an auto accident, even if the suit is groundless or false. We will choose the counsel.

We may settle any claim or suit if we believe it is proper. (E. Appellee’s brief p. 7 of Allstate policy) (Emphasis in original). Allstate retained Rocco C. Nunzio, Esquire, as appointed counsel, to represent appellant in the suit filed by Ms. Baptiste. After his analysis of the circumstances of the accident and the extent of Ms. Baptiste’s injuries, Nunzio projected a jury verdict in favor of Ms. Baptiste in a range from $15,-000.00 to $25,000.00.

Nunzio conveyed this opinion in a letter dated July 26, 1991 to Mr. John Sinnicki, a senior casualty claim representative of Allstate. In that letter, Nunzio recommended to Allstate that it attempt to settle the case within a range of $10,000.00 to $17,500.00. In a reply letter dated July ²⁸² 31, 1991, Mr. Sinnicki (on behalf of Allstate) partially concurred with Nunzio’s recommendation: Dear Mr. Nunzio: Thank you for your letter dated July 26,1991. I fully agree with your analysis on this matter.

I would appreciate it if you could get an itemization of the medical specials. I definitely agree that we should attempt to settle this case for $10,000.00. Allstate refused, however, to allow Nunzio to proceed either with conducting discovery or obtaining an independent medical evaluation (“IME”) of Ms. Baptiste’s medical condition. In a demand letter to Nunzio dated December 13, 1991, counsel for Ms. Baptiste, Bruce A. Blaylock, Esquire, submitted special damages of medical expenses and lost wages incurred by his client in the amount of $7,103.26.

In addition, Ms. Baptiste offered to settle the case for the lesser of the policy limits (of $20,000.00) or $60,000.00. 2 Subsequently, Nunzio sent appellant a letter dated January 2,1992, accompanied by a copy of the demand letter from Blaylock, advising appellant to “obtain excess counsel with respect to any excess liability.” Based on Nunzio’s recommendation, appellant retained the services of Gerald Solomon, Esquire, Jules R. Bricker, Esquire, and Harisha J. Bastiampillai, Esquire (all of whom are from the Law Office of Gerald Solomon, which firm is also appellant’s counsel in this appeal) (hereinafter collectively referred to as “Solomon.”) Upon review of Nunzio’s files regarding appellant’s case, Solomon determined the following: Appointed Counsel [Nunzio] sought authorization from Allstate to conduct discovery in Mr. Campbell’s defense, including the taking of Ms. Baptiste’s deposition. Allstate refused to authorize this discovery; ²⁸³ Appointed Counsel requested that Allstate authorize funds for an Independent Medical Examination. Allstate refused this as well; Appointed Counsel permitted the discovery deadline to pass without obtaining the discovery he requested; and Appointed counsel took no action to protect his client, Mr. Campbell, from excess exposure. Subsequently, in a letter dated January 30, 1992, Solomon recommended to Allstate (via Sinnicki) that it settle within appellant’s policy limits and gave as support the following reasons: If you do not settle this case then you face very real exposure to a claim by Mr. Campbell; The cost of defense of this litigation will greatly exceed the cost of litigation, both in attorney’s and expert’s fees, project[ed] at more than $10,000.00; You are not in a position to present evidence contradicting the claims of the Plaintiff.

Solomon also informed Allstate that Nunzio had suggested that appellant, rather than Allstate, obtain independent counsel regarding excess liability. By his actions (Solomon argued in his letter), Nunzio aligned himself with the carrier [Allstate], as opposed to the insured, and, within his scope of representation of his principal, delegated the carrier’s right to choose counsel to the insured. Despite Solomon’s recommendation, Allstate still refused to settle the case. Consequently, appellant filed the Complaint For Declaratory Relief to enforce his rights under the insurance contract.

Solomon then decided to mitigate appellant’s excess liability by offering to sell Ms. Baptiste any potential chose in action that he had against Allstate in return for an indemnification and hold harmless agreement for any excess in liability. Shortly before trial (and just after Solomon tendered the proposed agreement to sell the chose in action), Allstate finally settled the case for the policy limits of $20,000.00. Appellant ²⁸⁴ then filed his Amended Complaint to recover the attorney’s fees and expenses in the amount of $4,218.85 incurred in obtaining excess counsel. The trial judge' granted Allstate’s Motion to Dismiss the Amended Complaint, finding that there was not a cause of action in contract.

From that dismissal, appellant filed this timely appeal.

II

DISMISSAL OF AMENDED COMPLAINT Because appellant’s Amended Complaint was dismissed by the lower court for failure to state a claim upon which relief can be granted and, consequently, no hearing on the merits was held, we need not address the propriety of Allstate’s substantive arguments regarding its handling of the underlying suit. The only ruling made by the trial judge was that Maryland does not recognize a cause of action for Breach of Contract in a suit against an insurer for wrongful refusal to settle. Allstate, of course, agrees with the lower court’s dismissal of appellant’s claim for two reasons. 3 First, Allstate submits that, if appellant had any claim at all against it for wrongfully refusing to settle appellant’s case, its liability for the bad faith handling of a third-party claim is exclusively in tort, and not in contract, since Maryland does not recognize a breach of contract action for exposure to an excess verdict. Moreover, Allstate avers that, notwithstanding the insufficiency of appellant’s pleading, such a cause of action in negligence vests only after the policyholder is exposed to an excess judgment or verdict.

The inference we draw from Allstate’s argument is that the insured has no cause of action whatsoever for attorneys’ fees incurred even if an insurer acts in bad faith during its negotiation of the claim, so long as it ultimately settles the ²⁸⁵ case prior to trial — without exposing its insured to any excess liability over and above his policy limits. A. Appellant’s Pleading The fact that appellant captioned his Amended Complaint in terms of a Breach of Contract is not fatal to his claim that Allstate acted in bad faith (which cause of action sounds in negligence) in refusing to settle the underlying case. Maryland Rule 2-305 provides that [a] pleading that sets forth a claim for relief, ... shall contain a clear statement of the facts necessary to constitute a cause of action and a demand for judgment for relief sought. The Court of Appeals has held that in order for a pleading to state a cause of action for negligence, it must allege, with certainty and definiteness, facts and circumstances sufficient to set forth (a) a duty owed by the defendant to the plaintiff, (b) a breach of that duty and (c) injury proximately resulting from that breach.

Read Drug v. Colwill Constr. Co., Inc., 250 Md. 406, 412 , 243 A.2d 548 (1967). In Jackson v. Pennsylvania R.R. Co., 176 Md. 1 , 3 A.2d 719 (1939), the Court was more specific as to the required sufficiency of a pleading: In order for a plaintiff to have a right of action in negligence against a defendant there must exist a duty which is owed by the defendant to the plaintiff to observe that care which the law prescribes in the given circumstances, a breach by the defendant of that duty, damages and injury suffered by the plaintiff as the demonstrable effect of the breach of duty. Negligence is, therefore, the absence of care according to the circumstances.

So, an action for negligence involves the certain and definite allegation of the circumstances, and the failure of the defendant to exercise the care which the law required according to these circumstances. If the allegations should be insufficient to show a duty ²⁸⁶ breached which was the efficient cause of the injury, the declaration is bad on demurrer. Id. at 5 , 3 A.2d 719 (emphasis in original). In his Amended Complaint, appellant alleged, inter alia, the requisite elements of a tort claim: 6.

Defendant [Allstate] is bound by contract and fiduciary duty to fully represent Plaintiff [appellant] in the automobile action. ****** 19. Due to Defendant’s failure to defend in good faith, Plaintiff has been caused to procure counsel to represent him in Baptiste v. Campbell [the underlying suit]. 20. Plaintiffs counsel [Solomon] properly and vigorously represented Mr. Campbell [appellant] in the suit incurring legal fees and expenses, as itemized in the attached bills. ****** 22. Defendant refused to pay for the said legal representation. ****** These allegations, if proved (as the following discussion will indicate) could result in liability on the part of Allstate for ■wrongfully refusing to settle appellant’s case.

The mere “inartful” titling of appellant’s pleading in terms of breach of contract does not render invalid the substance of the pleading itself. We believe that appellant stated a claim upon which relief could have been granted and, therefore, hold that the lower court erred in granting Allstate’s motion to dismiss appellant’s Amended Complaint to the extent, inter alia, that the court’s ruling was based on the applicability of a breach of contráet theory. B. Exposure to Excess Judgment Allstate’s reasoning with regard to its exposure argument is equally without merit. Even if Allstate’s submission that a cause of action in negligence vests after the policyholder is exposed to an excess judgment is correct, that is precisely what ■ transpired in the instant case.

Because the amount ²⁸⁷ sought by Ms. Baptiste in the underlying suit exceeded the limits of appellant’s insurance policy, appellant became exposed to an excess judgment the moment that Allstate arbitrarily declined the settlement offer advanced by Ms. Baptiste. 4 While it is true that appellant suffered no damages related to an excess judgment or verdict, he certainly suffered damages in the form of attorneys’ fees in securing counsel to protect him against potential excess liability. We cannot accept, and indeed find no authority to support, the notion that an insured who is entitled to damages for a judgment in excess of his policy limits cannot also recover attorneys’ fees incurred in connection with an attempt to minimize that exposure.

III

DUTY TO DEFEND AND DUTY TO SETTLE It is well established in Maryland law that [t]he obligation of an insurer to defend its insured under a contract provision such as here involved is determined by the allegations in the tort actions. If the plaintiffs in the tort suits allege a claim covered by the policy, the insurer has a duty to defend. Even if a tort plaintiff does not allege facts which clearly bring the claim within or without the policy coverage, the insurer still must defend if there is a potentiality that the claim could be covered by the policy. Brohawn v. Transamerica Ins.

Co., 276 Md. 396, 407 , 347 A.2d 842 (1975) (citations omitted; emphasis in original). In the instant case, appellant asserts that under his automobile insurance policy with Allstate, he was entitled not only to “liability” protection, but also “litigation” insurance to protect him from the expense of defending claims brought against him by Ms. ²⁸⁸ Baptiste. In support of his allegation, appellant cites Brohawn for the following proposition: [The insurance company] assume[s] the obligation of relieving its insured of the expense of defending an action alleging and seeking damages within the policy coverage. Additionally, the insured could reasonably expect that the insurer will employ its vast legal and investigative resources to defeat the action for the mutual benefit of both the insurer and the insured.

Id. at 410 , 347 A.2d 842 . Furthermore, appellant argues, based on Riviera Beach Volunteer Fire Co., Inc. v. Fidelity and Casualty Co. of New York, 388 F.Supp. 1114 (D.Md.1975), this duty to defend is entirely separate and distinct from, and not dependent upon, the insurer’s liability to pay, although the two are ultimately related in that both are dependent upon the basic scope of coverage under the policy. Thus, an unjustified refusal by the insurer to properly carry out that duty constitutes a breach of contract subjecting it to liability for any damages suffered by the insured as a result thereof, including any attorney’s fees incurred by the insured in bringing a declaratory judgment action to establish the insurer’s breach. Id. at 1120 (citations omitted; emphasis added).

With the above legal principles as a background, appellant asserts that the facts of this case clearly present a breach of Allstate’s contractual duty to