Mountain West Farm Bureau Mutual Insurance v. Brewer

No. 01-512

IN THE SUPREME COURT OF THE STATE OF MONTANA

2003 MT 98

MOUNTAIN WEST FARM BUREAU

MUTUAL INSURANCE COMPANY,

Plaintiff and Respondent,

v.

ADDI BREWER, Respondent,

and ASHLEY CHRISTENSEN,

Defendants and Appellants.

______________________________________________

CHRIS CHRISTENSEN and ANGIE CHRISTENSEN,

individually and as guardians and conservators for

ASHLEY L. CHRISTENSEN and her estate,

Petitioners and Appellants,

v.

MOUNTAIN WEST FARM BUREAU MUTUAL

INSURANCE COMPANY,

Respondent and Respondent.

APPEAL FROM: District Court of the Fourth Judicial District,

In and for the County of Missoula, Cause No. DV-98-86570,

The Honorable John W. Larson, Judge presiding.

COUNSEL OF RECORD:

For Appellants:

Robert T. Bell, Richard A. Reep, Reep, Spoon & Gordon, P.C., Missoula,

Montana

For Respondent:

Lon J. Dale, Milodragovich, Dale, Steinbrenner & Binney, P.C., Missoula,

Montana

Submitted on Briefs: January 31, 2002

Decided: April 24, 2003

Filed:

__________________________________________

Clerk

Justice Jim Regnier delivered the Opinion of the Court.

¶1 The Appellants, Chris and Angie Christensen (“Christensens”), appeal from an order

issued by the Fourth Judicial District Court, Missoula County, denying their request for

attorney fees. We reverse and remand.

¶2 The parties present the following issues on appeal:

¶3 1. Did the Christensens waive their right to recover attorney fees?

¶4 2. Is an injured third-party claimant who prevails in an insurance coverage action

against a motor vehicle liability insurer entitled to recover his or her attorney fees?

BACKGROUND

¶5 Following a single vehicle accident in which the Christensens’ daughter, Ashley

Christensen, sustained significant injuries, the Christensens filed a declaratory judgment

action against Mountain West Farm Bureau Mutual Insurance Company (“Mountain West”)

to establish insurance coverage under a Mountain West motor vehicle policy. The District

Court entered summary judgment in favor of Mountain West and we reversed. For a

recitation of the factual and procedural background of that phase of the case, see Christensen

v. Mountain West, 2000 MT 378, 303 Mont. 493, 22 P.3d 624.

¶6 On remand, the Christensens moved for an award of attorney fees incurred in the

declaratory judgment action. The Christensens submitted § 27-8-313, MCA, the

“supplemental relief” provision of the Uniform Declaratory Judgments Act, and the

insurance exception to the American Rule as authority for an award of attorney fees. On

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June 19, 2001, the District Court denied the Christensens’ motion. On July 13, 2001, the

Christensens filed a notice of appeal from the District Court’s denial.

STANDARD OF REVIEW

¶7 Whether an injured third-party claimant who prevails in an insurance coverage action

against a motor vehicle liability insurer may recover his or her attorney fees is a question of

law. We review issues of law to determine whether the district court’s interpretation of the

law is correct. Armstrong v. Gondeiro, 2000 MT 326, ¶ 12, 303 Mont. 37, ¶ 12, 15 P.3d

386, ¶ 12.

DISCUSSION

ISSUE ONE

¶8 Did the Christensens waive their right to recover attorney fees?

¶9 Under Montana’s Rules of Civil Procedure, a party must give notice to the other party

of the facts which he or she expects to prove, and the facts must disclose the presence of all

the elements necessary to make out a claim. See Rule 8(a), M.R.Civ.P.; Mysse v. Martens

(1996), 279 Mont. 253, 266, 926 P.2d 765, 773. Similarly, if a party fails to raise an issue

or argue it in his or her brief, we will deem the issue waived and will not address it.

Schaubel v. Iversen (1993), 257 Mont. 164, 166, 848 P.2d 489, 490; Teesdale v. Anschutz

Drilling Co. (1960), 138 Mont. 427, 431, 357 P.2d 4, 7. We have also held that if a party

fails to raise an issue on a first appeal, he or she cannot then raise the issue in a second

appeal. Downs v. Smyk (1982), 200 Mont. 334, 343, 651 P.2d 1238, 1242, overruled on

other grounds by Gray v. City of Billings (1984), 213 Mont. 6, 689 P.2d 268.

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¶10 Mountain West argues that because the Christensens never requested attorney fees in

either their briefs for summary judgment or in their first appeal before this Court, they have

waived their right to now request them. The Christensens counter that they requested

attorney fees in their initial Petition for Declaratory Relief. While they did not request

attorney fees in their motion for summary judgment, Rule 56, M.R.Civ.P., allows a party to

move for summary judgment on a portion of a party’s action. The Christensens contend that

they simply sought summary judgment initially to establish insurance coverage, not attorney

fees. They point to their summary judgment motion’s title, Motion for Summary Judgment

re: Insurance Coverage, as support for this position.

¶11 The Christensens argue that they did not ask for attorney fees until after we remanded

the matter to the District Court because they had not yet prevailed in this matter. We have

previously held that a court may award attorney fees only to a prevailing party.

Kunst v. Pass, 1998 MT 71, ¶ 38, 288 Mont. 264, ¶ 38, 957 P.2d 1, ¶ 38. In Kunst, we

concluded that a plaintiff could seek attorney fees under the Residential Landlord and Tenant

Act despite failing to mention a claim for attorney fees in the complaint, pretrial order, or

trial brief. We reasoned that the defendants had notice of the claim since the plaintiff asked

for “other and further relief as the Court may deem just and proper,” they had an opportunity

to defend themselves at oral argument, and a court may award attorney fees only to a

prevailing party.

¶12 Here, Mountain West had notice of the Christensens’ desire to seek attorney fees as

they specifically prayed for such relief in their initial Petition for Declaratory Relief. Like

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the defendant in Kunst, Mountain West had an opportunity to defend against the request for

attorney fees, which it successfully did in the District Court. Finally, the Christensens had

not prevailed until we remanded the matter to the District Court. Thus, waiting to file a

motion for attorney fees until prevailing on appeal was proper. For these reasons, we

conclude that the Christensens did not waive their entitlement to attorney fees.

ISSUE TWO

¶13 Is an injured third-party claimant who prevails in an insurance coverage action against

a motor vehicle liability insurer entitled to recover his or her attorney fees?

¶14 Montana follows the general American Rule that a party in a civil action is not

entitled to attorney fees absent a specific contractual or statutory provision. Mountain West

Farm Bureau v. Hall, 2001 MT 314, ¶ 13, 308 Mont. 29, ¶ 13, 38 P.3d 825, ¶ 13. However,

we have recognized equitable exceptions to the American Rule. See, e.g., Mountain West,

¶ 14 (awarding attorney fees when a party incurs legal fees to establish a common fund

which avails non-participating beneficiaries); National Cas. Co. v. American Bankers, 2001

MT 28, ¶ 28, 304 Mont. 163, ¶ 28, 19 P.3d 223, ¶ 28 (awarding attorney fees where a party

has been forced to defend against a wholly frivolous or malicious action); School Trust v.

State ex rel. Bd. of Com’rs, 1999 MT 263, ¶ 67, 296 Mont. 402, ¶ 67, 989 P.2d 800, ¶ 67

(awarding attorney fees pursuant to the private attorney general theory). Further, we have

approved attorney fee awards in the absence of statutory or contractual authority where an

insurer breaches its obligation to defend an insured. See Home Ins. Co. v. Pinski Brothers,

Inc. (1972), 160 Mont. 219, 500 P.2d 945.

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¶15 The Christensens essentially submitted two theories to the District Court in support

of an attorney fee award, one discretionary and the other obligatory. First, the Christensens

maintained that § 27-8-313, MCA, authorizes a court, in its discretion, to award attorney fees

in declaratory judgment actions. Second, the Christensens argued that the insurance

exception to the American Rule, as recognized in Pinski Brothers, obligates an insurer to

compensate a prevailing insured for attorney fees incurred in a declaratory judgment action,

pursuant to a breach of contract theory. The Christensens acknowledge that in Montana, to

date, the insurance exception has applied to duty to defend cases only. However, the

Christensens urge expansion of the insurance exception to afford attorney fees incurred in

establishing a duty to indemnify.

¶16 Mountain West responds that no statutory or contractual authority exists to support

the Christensens’ attorney fee proposition. Further, citing Yovish v. United Services Auto.

Ass’n (1990), 243 Mont. 284, 794 P.2d 682, Mountain West insists that we have refused to

expand the insurance exception to incorporate duty to indemnify cases absent legislative

authority. Since no statutory or contractual authority supports an award of attorney fees, and

since none of the exceptions to the American Rule prove applicable to the case at bar,

Mountain West implores us to affirm the District Court.

¶17 The parties agree that no contractual authority exists to support an award of attorney

fees. As for statutory authority, we recently held that Ҥ 27-8-313, MCA, authorizes a court

to award attorney fees when the court, in its discretion, deems such an award ‘necessary or

proper.’” Trustees of Indiana University v. Buxbaum, 2003 MT 97, ¶ 42, ___ Mont. ___,

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¶ 42, ___ P.3d ___, ¶ 42. Clearly, the holding in Trustees of Indiana University applies to

this case and, in fact, the Christensens submitted § 27-8-313, MCA, to the District Court as

authority for an attorney fee award. However, the Christensens seek more than mere

discretionary authority for an award. On appeal, they submit that Mountain West is

obligated to reimburse them based on the insurance exception rationale articulated in Pinski

Brothers.

¶18 Pinski Brothers remains the seminal decision addressing the recovery of attorney fees

in an action between an insurer and insured. Pinski Brothers involved a suit between an

insurer and its insured over the insurer’s subrogation rights and the insured’s right to

damages for breach of the insurance contract. This Court held that the wrongful acts of the

insurer in suing its insured under nonexistent subrogation rights and refusing to defend the

insured constituted a breach of the insurer’s obligations under the insurance contract

rendering the insurer liable for attorney fees, expenses, and court costs occasioned by its

conduct. Pinski Brothers, 160 Mont. at 228, 500 P.2d at 950. Since Pinski Brothers, this

Court has on several occasions acknowledged an insured’s right to recover attorney fees

incurred on account of an insurer’s breach of the duty to defend. See, e.g., Lindsay Drilling

v. U.S. Fidelity & Guar. (1984), 208 Mont. 91, 97, 676 P.2d 203, 206; Truck Ins. Exchange

v. Woldstad (1984), 212 Mont. 418, 423, 687 P.2d 1022, 1025; Goodover v. Lindey’s Inc.

(1992), 255 Mont. 430, 448, 843 P.2d 765, 776.

¶19 Approximately eighteen years after we decided Pinski Brothers, we were asked in

Yovish to expand the insurance exception to afford attorney fee awards when an insurer

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breaches its duty to indemnify. In Yovish, an insured filed suit against his insurer to establish

coverage for an automobile accident following the insurer’s denial of coverage. Following

a bench trial, the district court concluded that coverage existed pursuant to an automobile

liability policy and awarded the insured attorney fees incurred in establishing coverage. The

insurer appealed.

¶20 On appeal, the insured did not advance a statutory or contractual justification for the

award. Therefore, we analyzed the award pursuant to the insurance exception instituted in

Pinski Brothers. We concluded:

We have approved awards of attorney fees in the absence of a specific

statute or contractual provision granting the right to attorney fees in cases

where an insurer has breached its obligation to defend an insured. The present

case, however, is not a case where an insurer has wrongfully refused to defend

an insured but where an insurer has wrongfully refused to provide coverage to

an insured. Although the distinction may be slight, we hesitate to expand the

exception to the general rule without legislative authority.

We understand that the failure to award attorney fees in cases such as

the present one may result in circumstances where the entire compensatory

award is consumed by the costs of litigation. We also recognize that the

failure to grant attorney fees may force insureds with modest claims simply to

accept an insurer’s erroneous denial of coverage. Nonetheless, the legislature,

not the courts, must remedy the wrongs created by this situation.

Yovish, 243 Mont. at 290-91, 794 P.2d at 686 (citations omitted). We now believe that our

deference to the Legislature in Yovish was misguided and it is hereby overruled.

¶21 Certainly, the American Rule and its corresponding exceptions derive from the

common law. See Schuff v. A.T. Klemens & Son, 2000 MT 357, ¶ 97, 303 Mont. 274, ¶ 97,

16 P.3d 1002, ¶ 97; 20 Am.Jur.2d Costs § 57 (1995). In Dimick v. Schiedt (1935), 293 U.S.

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474, 487, 55 S.Ct. 296, 301, 79 L.Ed. 603, the United States Supreme Court offered the

following about evolution of the common law:

It is said that the common law is susceptible of growth and adaptation

to new circumstances and situations, and that the courts have power to declare

and effectuate what is the present rule in respect of a given subject without

regard to the old rule; and some attempt is made to apply that principle here.

The common law is not immutable, but flexible, and upon its own principles

adapts itself to varying conditions. [Emphasis added.]

¶22 In Pence v. Fox (1991), 248 Mont. 521, 813 P.2d 429, this Court considered for the

first time whether a minor child could assert a loss of consortium claim following a tortious,

nonfatal injury to a parent. The respondents argued “that because social and economic

factors should be considered before extending to children the right to consortium claims, the

legislature is the appropriate body to create such an expansion.” Pence, 248 Mont. at 524,

813 P.2d at 431. We rejected this argument, stating “[t]he courts have the responsibility to

reform common law as justice requires.” Pence, 248 Mont. at 524, 813 P.2d at 431.

Further, we adopted the following conclusions from the Supreme Courts of Iowa and

Vermont:

The contention that recognition of such a cause of action is a question

for the legislature ignores the fact that the action for loss of consortium is a

creation of the common law, and that the development of the common law is

within the proper sphere of our authority and responsibility.

[S]uch an argument ignores our responsibility to face a difficult legal question

and accept judicial responsibility for a needed change in the common law . . .

when the conditions and needs of the society have changed, judges must adapt

the common law to those new conditions . . . . It must also be noted that our

recognition of a new cause of action for the loss of parental consortium, as in

the present case, in no way precludes the legislature from addressing the

subject; it is still free to act. The legislature may ratify, limit or reject our

holding.

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Pence, 248 Mont. at 524-25, 813 P.2d at 431 (citations omitted).

¶23 Pence does not represent an isolated incident of judicial action in the face of

legislative silence. This Court has on several occasions acted where a public policy vacuum

once existed. See Maguire v. State (1992), 254 Mont. 178, 196-97, 835 P.2d 755, 766-67

(Trieweiler, J., dissenting). Moreover, several sister jurisdictions have articulated positions

similar to the one announced in Pence. See, e.g., Bartholomew v. Schweizer (Conn. 1991),

587 A.2d 1014, 1019 (noting that in the absence of legislative action, courts have the

common law power to declare what the common law is); State ex rel. Atkinson v. Wilson (W.

Va. 1984), 332 S.E.2d 807, 812-13 (“Certainly it cannot be a usurpation of legislative power

for this Court to continue to define what has been left within the common law realm.”);

Surina v. Buckalew (Alaska 1981), 629 P.2d 969, 973 (“[I]t is our task to explicate the

common law which we will apply in these situations unless and until the Alaska legislature

acts to modify it.”).

¶24 As the American Rule and associated exceptions find their origin in the common law,

we need not, contrary to our statement in Yovish, await legislative direction to analyze the

issue presented. Instead, Pence vests authority with the judiciary to interpret, modify, and

apply common law principles in the absence of legislative preemption. We, therefore, erred

in Yovish when we deferred consideration of the insurance exception to the Legislature.

¶25 Thus, the question before us today is not whether we maintain authority to modify the

insurance exception, but whether, in fact, we should modify the exception. The Christensens

contend that no practical distinction exists between an unconditional refusal to defend and

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undertaking a defense under a reservation of rights to ascertain the existence of coverage.

We find the authority submitted in support of the Christensens’ position persuasive.

¶26 Professor Appleman appears to agree that any suggested distinction between a refusal

to defend and a challenge to the existence of coverage is transparent at best. In commenting

upon qualifications imposed on the right to recover attorney fees by some courts, Appleman

states:

[D]espite the qualifications placed upon this rule by the court, it still appears

to be unfair to the insured. After all, the insurer had contracted to defend the

insured, and it failed to do so. It guessed wrong as to its duty, and should be

compelled to bear the consequences thereof. If the rule laid down by these

courts should be followed by other authorities, it would actually amount to

permitting the insurer to do by indirection that which it could not do directly.

That is, the insured has a contract right to have actions against him defended

by the insurer, at its expense. If the insurer can force him into a declaratory

judgment proceeding and, even though it loses in such action, compel him to

bear the expense of such litigation, the insured is actually no better off

financially than if he had never had the contract right mentioned above.

7C Appleman, Insurance Law and Practice § 4691, at 282-83 (1979). While some courts

adhere to the principles lamented by Appleman, other courts have promulgated policy to

assuage Appleman’s concerns.

¶27 In Hegler v. Gulf Ins. Co. (S.C. 1978), 243 S.E.2d 443, Gulf Insurance Company

(“Gulf”) insured Hegler under a general automobile liability insurance policy. Following

a single vehicle accident, an injured passenger filed suit against Hegler. Gulf undertook

defense of Hegler in the underlying tort action under a reservation of rights. Gulf

subsequently filed a declaratory judgment action to determine its obligations under the

insurance policy, specifically whether it maintained a duty to indemnify Hegler. Hegler

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retained independent counsel to represent him in the declaratory judgment action and

ultimately prevailed against Gulf. Gulf subsequently denied Hegler’s request for

reimbursement of attorney fees incurred in the declaratory judgment action. Hegler filed suit

to recover the fees, the trial court denied Hegler’s request, and Hegler appealed to the South

Carolina Supreme Court.

¶28 On appeal, the South Carolina Supreme Court noted the untenable position in which

Hegler found himself–he had to employ independent counsel to defend against the denial of

coverage to maintain Gulf’s defense of the underlying tort claim. Thus, the South Carolina

Supreme Court observed the following:

The declaratory judgment action established respondent’s obligation

under the policy to defend the action for damages. If respondent had refused

initially to defend, it would undoubtedly have been liable for the payment of

counsel fees incurred by appellant in the defense of the damage action.

Instead however of refusing initially, respondent began the defense and then

sought, through the declaratory judgment action, to avoid any obligation to

continue to defend. In order to obtain respondent’s continued defense of the

action for damages, it was necessary for appellant to employ counsel to resist

the contention by respondent of lack of coverage. There is no material

difference in the legal effect between an outright refusal to defend and in

undertaking the defense under a reservation of rights until a declaratory

judgment is prosecuted to resolve the question of coverage. In either event,

an insured must employ counsel to defend in the first instance in the damage

action and in the second in the declaratory judgment action to force the insurer

to provide the defense. In both, the counsel fees are incurred because of the

insurer’s disclaimer of any obligation to defend.

Hegler, 243 S.E.2d at 444. Accordingly, the South Carolina Supreme Court reversed the

denial of fees and remanded for entry of judgment in favor of Hegler. Hegler, 243 S.E.2d

at 445.

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¶29 In Farm Bureau Mut. Ins. Co. v. Kurtenbach (Kan. 1998), 961 P.2d 53, the Kansas

Supreme Court was presented with an issue virtually identical to that contemplated in

Hegler. There, a third-party claimant filed suit against the insureds following an automobile

accident. The insureds requested that the insurer defend them in the underlying action and

indemnify them for any potential damages. The insurer provided a defense to the underlying

action under a reservation of rights and later filed a declaratory judgment action contesting

its obligations to the insureds. After ruling for the insureds, the trial court awarded attorney

fees to the insureds and the insurer appealed.

¶30 The Kansas Supreme Court affirmed the award, holding that an insured may recover

his or her attorney fees incurred in defending a declaratory judgment action when an insurer

denies coverage and the duty to defend and a trial court determines that coverage exists.

Kurtenbach, 961 P.2d at 64. The Kansas Supreme Court justified its holding with the

following:

Where an insurer gives notice of its intent to defend under a reservation of

rights and then brings a declaratory judgment action against its insured before

the underlying suit is resolved, seeking a determination that it has no duty to

defend, the insured must expend his or her personal funds to enforce a duty

under the existing policy–the duty to defend.

....

The availability of expenses and attorney fees in such a situation is

necessarily dependent on the existence of coverage. If it is determined in the

declaratory judgment action that no coverage exists under the policy, the fees

and expenses incurred by the insured are his or her own expense. If no

coverage exists, the insurer is without obligation to either defend or to pay for

any judgment rendered. . . .

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However, if it should be determined that coverage exists, one may

conclude that the insured was compelled to expend his or her own funds in

litigation expenses to obtain the benefit of his or her bargain with the insurer.

If these expenses are not reimbursed to the insured, the insured fails to obtain

a substantial benefit already paid for under the policy: the defense of the

claim.

Kurtenbach, 961 P.2d at 64.

¶31 In Hayseeds, Inc. v. State Farm Fire & Cas. (W.Va. 1986), 352 S.E.2d 73, an insured

filed suit against his own insurance company over a property damage claim. After prevailing

in the action, the insured sought recovery of his fees incurred in establishing coverage. The

West Virginia Supreme Court of Appeals acknowledged the general American Rule but

stated that “the disparity of bargaining power between company and policyholder (often

exacerbated by the dynamics of the settlement bureaucracy) make insurance contracts

substantially different from other commercial contracts . . . .” Hayseeds, 352 S.E.2d at 78.

The court extolled the virtues of the American Rule but then observed “the fact that the

general rule concerning fees works well most of the time does not necessarily imply that the

rule works well all of the time.” Hayseeds, 352 S.E.2d at 78. The court affirmed the

attorney fee award concluding that “[t]o impose upon the insured the cost of compelling his

insurer to honor its contractual obligation is effectively to deny him the benefit of his

bargain.” Hayseeds, 352 S.E.2d at 80.

¶32 The Washington Supreme Court followed the rationale employed in Hayseeds in

Olympic S.S. Co. v Centennial Ins. Co. (Wash. 1991), 811 P.2d 673. In Olympic S.S. Co.,

Olympic Steamship Company (“Olympic”) stored, labeled, cased, and shipped salmon for

various salmon packers. In 1985, Olympic discovered that its casing equipment was

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damaging the cans of salmon, subjecting consumers to an increased risk of botulism. This

discovery led to a product recall and destruction of the affected salmon. Olympic notified

its insurers of the situation in an effort to recover the costs incurred in the recall. The

insurers denied coverage for the claims and Olympic filed suit. Olympic prevailed on

summary judgment and recovered its attorney fees incurred in settling underlying claims and

establishing coverage. The insurers appealed, challenging, in part, the attorney fee award.

¶33 Citing Hayseeds, the Washington Supreme Court concluded:

When an insured purchases a contract of insurance, it seeks protection from

expenses arising from litigation, not “vexatious, time-consuming, expensive

litigation with his insurer.” Whether the insured must defend a suit filed by

third parties, appear in a declaratory action, or as in this case, file a suit for

damages to obtain the benefit of its insurance contract is irrelevant. In every

case, the conduct of the insurer imposes upon the insured the cost of

compelling the insurer to honor its commitment and, thus, is equally

burdensome to the insured.

. . . [W]e believe that an award of fees is required in any legal action where the

insurer compels the insured to assume the burden of legal action, to obtain the

full benefit of his insurance contract, regardless of whether the insurer’s duty

to defend is at issue.

Olympic S.S. Co., 811 P.2d at 681 (citations omitted). The court also extended to an insured

“the right . . . to recoup attorney fees that it incurs because an insurer refuses to defend or

pay the justified action or claim of the insured, regardless of whether a lawsuit is filed

against the insured.” Olympic S.S. Co., 811 P.2d at 681. Accordingly, the Washington

Supreme Court affirmed the award of attorney fees.

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¶34 In McGreevy v. Oregon Mut. Ins. Co. (Wash. 1995), 904 P.2d 731, the Washington

Supreme Court revisited the attorney fee issue discussed in Olympic S.S. Co. The court

stated:

[T]he thrust of our decision in Olympic Steamship is that equity recognizes

that an insurance company, because of its enhanced fiduciary obligation, owes

a measure of relief to its insured when certain factors combine to frustrate an

insured’s justifiable expectation of insurance protection. As referenced in

Olympic Steamship, those factors are (1) a disproportionate bargaining

position of an insurer vis-a-vis the typical insurance consumer; and (2) actions

of the insurer that cause an insured to suffer the costs of litigation in order to

compel an insurer to honor its commitment to provide coverage.

McGreevy, 904 P.2d at 737. The court reaffirmed the holding from Olympic S.S. Co., stating

“[i]n our opinion, when an insurer unsuccessfully contests coverage, it has placed its

interests above the insured. Our decision in Olympic Steamship remedies this inequity by

requiring that the insured be made whole.” McGreevy, 904 P.2d at 738.

¶35 Admittedly, courts have struggled with classifying the authority for the remedy

contemplated herein, i.e., is the award grounded in contractual principles or founded upon

an equitable exception to the American Rule or some combination of the two? Maryland’s

highest court deliberated over this very issue:

From the standpoint of a strict application of the American Rule, there

is no logical reason why the successful plaintiff’s action on a liability

insurance policy for breach of a promise to defend, or to pay the cost of

defense, should include counsel fees in prosecuting the breach of contract

action, when successful plaintiffs’ actions for other breaches of insurance

contracts, or for breaches of other contracts, do not ordinarily include those

counsel fees. The Maryland rule awarding to the successful insured counsel

fees in declaratory judgment or assumpsit actions with liability insurers for

breach of the promise to defend or to pay the cost of defense is an exception

to the American Rule.

17

Collier v. MD-Individual Practice (Md. 1992), 607 A.2d 537, 544. The Washington

Supreme Court, as indicated above, cites contractual principles in support of its position but

has stated that “we are satisfied that [the Olympic Steamship decision] is consistent with the

long-standing rule that an award of fees may be based on recognized grounds of equity.”

McGreevy, 904 P.2d at 735.

¶36 We find the above cited authority compelling to hold an insurer liable for attorney

fees when the insurer breaches its duty to indemnify. We decline to further propagate the

arbitrary legal fiction that a substantive distinction exists between a breach of the duty to

defend and the breach of the duty to indemnify. It seems inherently inconsistent that courts

universally afford attorney fees incurred to establish a contested duty to defend and yet,

simultaneously, reject such an award incurred in coverage disputes brought to preserve or

eviscerate the obligatory defense. As Appleman indicates, this notion appears nothing more

than an a mere exercise in semantics. Accordingly, we hold that an insured is entitled to

recover attorney fees, pursuant to the insurance exception to the American Rule, when the

insurer forces the insured to assume the burden of legal action to obtain the full benefit of

the insurance contract, regardless of whether the insurer’s duty to defend is at issue.

¶37 Unfortunately, the above holding does not conclude our inquiry into the issue

presented. Virtually all of the above cited cases from other jurisdictions analyze and apply

the respective holdings within the confines of a first-party insurance dispute. The authorities

justify expansion of the insurance exception based on the insurer’s contractual duty to the

insured, the disparity of bargaining power between the parties, and the enhanced fiduciary

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obligation running from the insurer to the insured. Appleman, as well as some of the above

cases, couch availability of attorney fees for breaching a coverage obligation in terms of

preserving the more universally protected duty to defend. Certainly, each of these rationales

rings true in first-party insurance disputes. However, the analysis proves somewhat

inapplicable in third-party disputes.

¶38 As a third-party dispute, this case does not present the traditional, contractual

relationship associated with an insurer and insured. The Christensens did not purchase a

contract of insurance from Mountain West. As such, Mountain West has not exploited an

inherently unequal bargaining position or frustrated a justifiable expectation of insurance

protection. The Christensens did not expend their own funds to obtain a previously

bargained for benefit. Further, Mountain West owes no duty to the Christensens to defend

them in any proceeding. In short, the Christensens point to no contractual corollary which

would impose fiduciary obligations upon Mountain West.

¶39 Instead, the Christensens cite public policy reasons for extending the insurance

exception to third-party beneficiaries. That is, the Christensens argue that the Legislature’s

promulgation of compulsory motor vehicle liability insurance evinces an intent to “extend

the right to enforce the insurance contract to injured persons, not just insureds.”

¶40 We do not take issue with the alleged prophylactic motives attendant with compulsory

motor vehicle liability insurance. In fact, we have held that “it is clear that the mandatory

liability insurance law seeks to protect members of the general public who are innocent

victims of automobile accidents, and that § 61-6-301, MCA, was enacted for the benefit of

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the public and not for the benefit of the insured.” Watters v. Guaranty Nat. Ins. Co., 2000

MT 150, ¶ 29, 300 Mont. 91, ¶ 29, 3 P.3d 626, ¶ 29 (citation omitted). However, to extend

application of the insurance exception to third-party beneficiaries, individuals who are

strangers to the insurance contract, would sanction attorney fee awards for simply

demonstrating the existence of any insurance contract from which a third-party claimant

successfully established coverage. Such a tenuous application of the insurance exception

would undermine the exception’s fundamental pretext and drive a stake into the heart of the

American Rule. For the foregoing reasons, we decline to extend application of the insurance

exception to third-party claimants.

¶41 Our holding with regard to third-party beneficiaries does not leave the Christensens

without recourse in their attempt to recover their attorney fees. Today’s holding simply

precludes the Christensens from recovering the respective fees under the obligatory

insurance exception. However, as we indicated above, § 27-8-313, MCA, authorizes a court

to award attorney fees when the court, in its discretion, deems such an award “necessary or

proper.” See Trustees of Indiana University, ¶ 42. Accordingly, we remand this matter to

the District Court for it to determine, pursuant to § 27-8-313, MCA, whether an award of

attorney fees is “necessary or proper,” and, if so, the amount of such award.

¶42 Reversed and remanded for further proceedings consistent with this Opinion.

/S/ JIM REGNIER

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We Concur:

/S/ KARLA M. GRAY

/S/ PATRICIA COTTER

/S/ W. WILLIAM LEAPHART

/S/ JIM RICE

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Justice Terry N. Trieweiler concurring and dissenting.

¶43 I concur in the majority's conclusions that the Appellants did not waive the right to

claim attorney fees; that an insurer should be liable for attorney fees when it breaches its

duty to indemnify; and that, therefore, this Court's prior decision in Yovish v. United Services

Auto. Ass'n (1990), 243 Mont. 284, 794 P.2d 682, should be reversed.

¶44 I dissent from the majority's conclusion that an exception to the American Rule

regarding attorney fees should not be extended to third-party claimants to whom indemnity

has been wrongfully denied by an insurer. While I agree with the Court's reasoning for

extending the right to recover attorney fees to insureds who have had to incur attorney fees

to enforce an insurer's contractual obligation to indemnify them, I fail to see how that

reasoning is not equally applicable to third-party claimants who are wrongfully denied

indemnification pursuant to the same contractual obligation.

¶45 As noted by the majority, the American Rule is simply the result of prior court

decisions. It is not a statutory rule, nor is it a constitutional requirement. Therefore, as we

stated in Pence v. Fox (1991), 248 Mont. 521, 524, 813 P.2d 429, 431, this Court has an

obligation to reconsider that rule when justice requires. As pointed out in ¶ 14 of the

majority Opinion, we have frequently done so where we concluded that justice required and

we do so again today in the majority Opinion. However, the majority Opinion does not go

far enough. Appleman states that:

If the insurer can force [the insured] into a declaratory judgment proceeding

and, even though it loses in such action, compel him to bear the expense of

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such litigation, the insured is actually no better off financially than if he had

never had the contract right mentioned above.

Appleman, 7C Insurance Law and Practice § 4691, at 282-83 (1979).

¶46 The majority cites as other reasons for its decision the disproportionate bargaining

position of the insurer and the futility of recovery when it must be at great expense. All these

considerations are equally applicable to injured third-party claimants who have a right to

indemnity pursuant to the insurer's contract with its insured, and, in some instances, based

upon the mandatory liability coverage laws of this state.

¶47 The majority, while correctly recognizing that common laws are meant to be modified

when justice so requires, then draws an artificial distinction between insureds and third

parties based on the contractual relationship of the insured. In doing so, the majority once

again genuflects at the alter of the American Rule. However, the distinction is unimportant

to the interest in equity which required the majority to consider another exception to the

American Rule in the first instance.

¶48 While it is true that the insurer has a contractual obligation to its insured, that same

contract, as well as Montana's public policy, give rise to an insurer's separate obligation to

injured third parties.

¶49 In the late 1970s, the legislature enacted mandatory liability protection provisions,

found at §§ 61-6-301 to 304, MCA. As the majority indicates, we have held that:

[i]t is clear that the mandatory liability insurance law seeks to protect members

of the general public who are innocent victims of automobile accidents, and

that § 61-6-301, MCA, was enacted for the benefit of the public and not for

the benefit of the insured.

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Watters v. Guaranty Nat. Ins. Co., 2000 MT 150, ¶ 29, 300 Mont. 91, ¶ 29, 3 P.3d 626, ¶ 29

(citing Iowa Mut. Ins. Co. v. Davis (1988), 231 Mont. 166, 170-71, 752 P.2d 166, 169).

¶50 Fifteen years ago, Justice John Sheehy poignantly described the obligations of an

insurer to an injured third-party claimant:

More than ever, this case points up the necessity of this Court examining the

duty of insurance companies toward third party claimants in the light of the

mandatory insurance law. . . . [T]he purpose of the mandatory insurance law

is to protect third party motorists on our highways. The duty of the insured to

protect third party claimants and not harass them or refuse to pay their just

claims is of greater import under mandatory insurance laws. The rights of the

third party claimant now in automobile accident cases arise not merely through

the insurance contract between the other motorist and his company but through

the determination of the legislature that the general traveling public is to be

protected. . . .

Hart-Anderson v. Hauck (1988), 230 Mont. 63, 79, 748 P.2d 937, 947 (Sheehy, J.

dissenting).

¶51 Furthermore, the legislature has extended to third-party claimants an independent

cause of action for an insurer's unfair claims settlement practices without regard to the state's

mandatory liability provision. Section 33-18-242, MCA.

¶52 Insurers can easily avoid their statutory obligations as well as their contractual

obligation when injured third parties are compelled to expend large sums of money on

attorney fees and court costs to compel payment of what was owed in the first place. If

injured third parties are compelled to expend these costs without reimbursement when

coverage has been wrongfully denied, the statutory and contractual obligations referred to

by Justice Sheehy are meaningless.

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¶53 In summary, I see no reason for distinguishing between the plight of insureds who are

wrongfully denied indemnity pursuant to their insurance contract and injured third parties

who are wrongfully denied indemnity in spite of the insurer's contract with its insured and,

quite often, in violation of the insurer's statutory obligations. Extending the right to be

reimbursed for attorney fees to injured third parties would "eliminate yet another avenue

through which the compensation of innocent automobile accident victims can be

sidestepped." See Iowa Mut. Ins. Co. v. Davis (1988), 231 Mont. 166, 172, 752 P.2d 166,

170.

¶54 For these reasons, I concur in part and dissent in part from the majority Opinion.

/S/ TERRY N. TRIEWEILER

Justice James C. Nelson joins in the foregoing concurring and dissenting opinion.

/S/ JAMES C. NELSON

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