Lawrence v. Massachusetts Bonding & Ins.

LEHMAN, J. On April 22, 1913, the defendant agreed to indemnify the plaintiff for liability for damages on account of bodily injuries suffered by any person by reason of certain work which was to be prosecuted on premises owned by the plaintiff. The defendant also agreed to defend any suit, even if groundless. The policy contained a provision that: “No action shall lie against the company to recover for any loss or expense under this policy unless it shall be brought by the assured for loss or expense incurred and paid in money by the assured, after trial of the issue; nor unless such action is brought within 96 days after the payment of such losá and expense.” At the trial it appeared that the plaintiff’s watchman was injured by a fall into a hole on the premises left by a contractor engaged in the prosecution of the work described in the policy of insurance. The watchman died as a result of the injuries. His administratrix then began suit against the plaintiff, and the insurance company refused to defend the suit on the ground that the accident was not covered by the policy of the insurance. Thereafter, on the 30th day of December, 1913, the plaintiff, upon the advice of his counsel and with the approval of the surrogate, compromised the said action by payment of the sum of $500. On December 7, 1915, the plaintiff started the present action for breach of the defendant’s agreement to defend the action, claiming that the damages for such breach are the sum of $500, paid in settlement of the original action, and $100 counsel fee, paid therein. The defendant conceded at the trial that the counsel fee was reasonable, but no proof was presented to show that the plaintiff was actually liable in the negligence action. At the close of the trial both sides moved for the direction of a verdict, and the learned trial justice directed a verdict for the plaintiff, but reserved decision on the motion to set aside the verdict. Thereafter he set aside the verdict and dismissed the complaint, on the ground that the action was not brought within 90 days after the payment of the loss and expense. The defendant now seeks to sustain the judgment of dismissal [885] on various grounds, but I think that only two of the contentions raised require serious consideration, viz., that the plaintiff has presented no evidence that he was liable to the administratrix of the deceased, and that the action was not brought within the time limited by the contract. [ 1 ] In determining the rights of the parties in this action it seems to me that the most important consideration is that the action is not brought to enforce the agreement to indemnify the plaintiff for loss and expenses, but is brought, for damages for failure to defend an action. The defendant agreed to defend all actions, even an action which is groundless. It broke this agreement, and is liable for the damages caused by its breach. This action is brought for these damages. In addition, the defendant insured the plaintiff against “loss from the liability imposed by law upon the assured for damages on account of bodily injuries suffered” in certain cases; but this action is not predicated upon the express agreement of the defendant to pay the loss and expenses caused by an accident covered by the policy. The limitation in the policy is, I think, by its plain terms intended to cover an action for such loss and expenses, and is not intended to cover an action for damages caused by the breach of the covenant to defend. Inasmuch as the limitation applies only to actions brought to recover any loss or expense “under this policy,” against which the defendant expressly agreed to indemnify the plaintiff, while this action is brought to recover damages for breach of contract to defend, the present action is subject only to the limitation of the statute, and not to any limitation provided in the contract. In other words, I think that a fair construction of the contract is that the defendant agreed to pay any loss or expense, and provided the manner in which such loss or damage must be proven, and a limitation on actions to prove such loss or damage. It has itself made it unnecessary, if not impossible, by its own wrongful act, for the plaintiff to prove the damages in the manner agreed upon. The contract never contemplated that the defendant would breach its contract, and it contains no provisions for an action for such breach of contract. Such an action, consequently, is governed by the ordinary rules of law governing actions for breach of contract. [2] The same considerations in my opinion must determine the question of whether, in such an action, the plaintiff must prove that hq was liable to the administratrix of the deceased. In the case of Mayor, Lane & Co. v. Commercial Casualty Ins. Co., 169 App. Div. 772, 155 N. Y. Supp. 75, the Appellate Division reversed a judgment for the amount paid in settlement of a claim, where the defendant had also wrongfully refused to defend, holding that: “When * * * the assured saw fit to settle before a recovery, he assumed the risk in an action against the insurer of showing not only a liability covered by the policy but the amount of the liability.” The rule of law there announced is clearly binding upon us, if it is applicable to the present case. The opinions in that case show, however, that the court construed the action as one to enforce the covenant to indemnify, and not as an action for breach of contract to de [886] fend. The effect of the covenant to defend was considered only in its bearing upon the question of whether the defendant, by breaching this covenant, had waived any benefit of the clause precluding the plaintiff from settling an action, and the opinion of the Appellate Division must be read in the light of the question considered by it. In the present case, however, as pointed out above, the action is for this breach. There can be no question but that such an action would lie, even if the contract contained no covenant of indemnity. In such an action the plaintiff is entitled to recover his proximate damages. There can be no question that the reasonable value of the services of an attorney in defending the original action are proximate damages for the defendant’s failure to defend the action itself. In this case the services of the attorney up to the time of the settlement were concededly worth $100. There remains, however, the question whether the amount paid upon the settlement was also proximate damages. In the case of St. Louis Beef Co. v. Casualty Co., 201 U. S. 173, at page 182, 26 Sup. Ct. 400 at page 404 (50 L. Ed. 712), the court stated: “We assume that the settlement was reasonable, and that the plaintiff could not * * * escape at less cost by defending the suits. If this were otherwise, no doubt the defendant would profit by the fact. The defendant did not agree to repay a gratuity, or more than fairly could be said to have been paid upon compulsion. But a sum paid in the prudent settlement of a suit is paid under the compulsion of the suit as truly as if it were paid upon execution.” As I read this case, as well as the various cases in New York, in which this question has been considered and the doctrine of the federal decision followed (Mayor, Lane & Co. v. Commercial Casualty Insurance Co., supra; Matter of Empire State Surety Co., 214 N. Y. 553, 108 N. E. 825), the true rule is that, where a settlement is made after failure of the insurance company to defend the action the insured is entitled to recover the amount paid in settlement of the action only upon proof of actual liability, where the amount paid is more than the reasonable and probable cost of defending the action but •may recover the amount so paid without such proof where the settlement is no more than the reasonable cost of defending the action, even though the insured would be ultimately not liable. In the one case the claim against the insurer would obviously be for indemnity; in the second case, the claim for damages would obviously be for the damages directly caused by the failure of the insurer to defend the action. In this case, therefore, the real question is whether there is any evidence in this case that the settlement of the action brought by the administratrix was a reasonable settlement of a groundless action. ■ Upon this poiiit the evidence showed that the deceased met his death' by negligence for which it was claimed that the plaintiff was responsible. We must therefore assume that the administratrix would have recovered substantial damages if the insured had been responsible, and the amount of possible liability would be one element in determining the value of the attorney’s services in defending such an action. It was also conceded that the reasonable value of the services of the attorney without a trial was $100. It seems to me that under these [887] circumstances we have a right to infer that the services of an attorney upon the trial and upon a possible appeal would be reasonably worth $500 in addition. Certainly, if the court upon these facts were asked to approve in advance of a contract by which a defendant in a negligence action agreed to pay his attorney the sum of $600 for all proceedings in the action until its final determination, it would be justified in holding such a contract reasonable. If in this case we should sustain the defendant’s contention that actual liability in the negligence action must be shown, then it follows that an insured, who has a contract by which an insurance company agreed to defend all actions, even though groundless, must go to the trouble and expense of actually defending the action until its final determination or lose the benefit of the insurance company’s covenant to defend the action. The order setting aside the verdict should therefore be reversed, and the verdict reinstated, with $30 costs of the appeal.