Shoshone First Bank v. Pacific Employers Insurance Co.
2000 WL 339787, 2000 Wyo. LEXIS 67, 2 P.3d 510 (2000)
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Rule of Law:
Under Wyoming law, an insurer's duty to defend extends to all claims in a lawsuit if at least one claim is potentially covered, and the insurer cannot allocate defense costs for non-covered claims to the insured unless the policy expressly allows it. However, the duty to defend does not include the costs of prosecuting the insured's counterclaim, which can be allocated back to the insured.
Facts:
- Pacific Employers Insurance Company (Pacific) issued a commercial general liability insurance policy to Shoshone First Bank (Shoshone).
- A former director sued Shoshone, alleging six causes of action, including breach of contract, infliction of severe emotional distress, and invasion of privacy.
- Shoshone, through its retained attorneys, filed an answer to the director's complaint and also asserted a counterclaim against the director.
- Pacific agreed to defend Shoshone under a reservation of rights because one of the six claims, invasion of privacy, was potentially covered by the policy's "personal injury" coverage.
- Pacific asserted its right to allocate to Shoshone the defense costs related to the five uncovered claims and the costs associated with prosecuting the counterclaim.
- The underlying lawsuit filed by the director was eventually settled through court-ordered mediation.
Procedural Posture:
- Pacific Employers Insurance Company filed a complaint for declaratory judgment against Shoshone First Bank in the United States District Court for the District of Wyoming.
- Shoshone answered and asserted counterclaims against Pacific, including claims for breach of contract and insurance bad faith.
- The parties entered into a stipulation to limit the litigation to the question of Pacific's right to allocate defense costs and counterclaim costs.
- Both Pacific and Shoshone filed motions for summary judgment on the stipulated issues.
- The United States District Court for the District of Wyoming certified the legal question regarding the right of allocation to the Supreme Court of Wyoming for a decision on state law.
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Issue:
Under Wyoming law, does an insurer have a legal or equitable right to allocate to its insured and recover (1) the costs of defending non-covered claims when at least one claim is covered, and (2) the costs of litigating the insured's counterclaim?
Opinions:
Majority - Thomas, Justice
No, as to the defense of non-covered claims; Yes, as to the litigation of the counterclaim. An insurer cannot allocate the costs of defending non-covered claims to its insured when a lawsuit includes at least one covered claim, but it can recover the costs of prosecuting the insured's counterclaim. The court reasoned that the duty to defend applies to the entire "suit," not just individual claims, and any ambiguity in the policy's language must be construed against the insurer. Allowing allocation for defending non-covered claims would be impractical and inefficient, requiring separate counsel and creating potential conflicts. Furthermore, a reservation of rights letter cannot unilaterally amend the insurance contract to create a right of allocation that was not originally present. Conversely, the policy only obligates the insurer to defend claims brought "against" the insured, not to prosecute affirmative claims on the insured's behalf. Therefore, costs for prosecuting a counterclaim, which is not part of the defense, can be allocated back to the insured.
Analysis:
This decision establishes Wyoming as a "minority rule" jurisdiction regarding the allocation of defense costs, prioritizing the insured's reasonable expectation of a complete defense over the insurer's desire to limit costs. It creates a bright-line rule that insurers must bear the full cost of defending a mixed-claim lawsuit unless an allocation provision is explicitly written into the policy. This holding places the burden on insurers to draft their policies with greater specificity if they wish to seek reimbursement for defending uncovered claims. The court's separate holding on counterclaims, however, aligns with the majority of jurisdictions by clearly distinguishing the insurer's duty to defend from any obligation to fund offensive litigation for the insured.
