No. 13-1153 -        State ex rel. Owners Insurance Company v. Honorable Warren R.
                     McGraw, Judge of the Circuit Court of Wyoming County, West
                     Virginia, and Morlan Enterprises, Inc.
                                                                  FILED
                                                               June 18, 2014
                                                                       released at 3:00 p.m.
                                                                       RORY L. PERRY II, CLERK
                                                                     SUPREME COURT OF APPEALS
                                                                         OF WEST VIRGINIA



Davis, Chief Justice, concurring:

              In this case, the petitioner, Owners Insurance, filed a petition for a writ of

prohibition seeking to challenge four rulings by the circuit court. The majority opinion has

determined that the issues were not proper for resolution through an extraordinary writ. I

concur in this determination. I have chosen to write separately to address issues raised in the

concurring and dissenting opinion of my good friend and colleague, Justice Ketchum.



              At the outset, let me be perfectly clear in pointing out that the doctrine of

equitable contribution has no application to Morlan’s claim in this case. The dissent simply

is legally wrong in arguing that Morlan does not have standing to recover its attorney’s fees.

As I will demonstrate below, the dissenting opinion has completely ignored the large body

of law that actually governs Morlan’s claim for attorney’s fees.



              To begin, the action against Owners was filed as a first-party bad faith action

by Morlan. The damages sought by Morlan include the recovery of the attorney’s fees its

legal counsel charged in the underlying action. Owners is attempting to minimize its

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damages by offsetting the attorney’s fees, because Westfield Insurance actually paid the fees

on behalf of Morlan. As a general matter, we have held the following regarding the recovery

of attorney’s fees in a bad faith action:

                     Where an insured is required to retain counsel to defend
              himself in litigation because his insurer has refused without
              valid justification to defend him, in violation of its insurance
              policy, the insured is entitled to recover from the insurer the
              expenses of litigation, including costs and reasonable attorney’s
              fees.

Syl. pt. 1, Aetna Cas. & Sur. Co. v. Pitrolo, 176 W. Va. 190, 342 S.E.2d 156 (1986). The

intent of Aetna is to allow an insured plaintiff to recover the costs of litigation when an

insurer wrongfully refuses to provide coverage.



              Owners’ attempt to offset the attorney’s fees paid on Morlan’s behalf in the

underlying litigation is precluded by the collateral source rule. This Court has described the

collateral source rule as follows:

                      The collateral source rule was established to prevent the
              defendant from taking advantage of payments received by the
              plaintiff as a result of his own contractual arrangements entirely
              independent of the defendant. Part of the rationale for this rule
              is that the party at fault should not be able to minimize his
              damages by offsetting payments received by the injured party
              through his own independent arrangements.

Ratlief v. Yokum, 167 W. Va. 779, 787, 280 S.E.2d 584, 590 (1981). We have held that

“[t]he purpose of the collateral source doctrine is to prevent reduction in the damage liability

of defendants simply because the victim had the good fortune to be insured or have other

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means of compensation.” Ilosky v. Michelin Tire Corp., 172 W. Va. 435, 447, 307 S.E.2d

603, 615 (1983). In tort actions similar to the instant case, courts have applied the collateral

source rule to prevent a defendant from offsetting attorney’s fees paid on behalf of a plaintiff

by an insurance company.



              For example, in Graco, Inc. v. CRC, Inc. of Texas, 47 S.W.3d 742 (Tex. App.

2001), a plaintiff was injured by a hydraulic ram machine. The plaintiff filed a products

liability action against the machine manufacturer, Graco, Inc., and the seller of the machine,

CRC, Inc. Thereafter, CRC filed a cross-claim for indemnity against Graco. After the

plaintiff’s underlying claim was settled, CRC’s insurer, State Farm, intervened in the

cross-claim. State Farm sought to recover $107,859.82 that it incurred in attorney’s fees and

expenses on behalf of CRC in the underlying action. Graco moved to strike State Farm’s

intervention. The trial court's final judgment awarded CRC $107,859.82 for attorney’s fees

and expenses incurred in the underlying action, and granted Graco’s motion to strike State

Farm’s intervention. On appeal, Graco argued that CRC was not entitled to recover

attorney’s fees. The issue was framed as follows:

                     Graco argues that because State Farm rather than CRC
              retained [the attorney], CRC incurred no obligation to pay [the
              attorney] and, thus, CRC incurred no compensable losses. CRC
              asserts the collateral source rule allows it to recover fees
              incurred by State Farm on CRC’s behalf.

Graco, 47 S.W.3d at 745. The appellate court agreed with CRC that the collateral source


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rule allowed it to recover the attorney’s fees that State Farm had paid. The opinion addressed

the matter thusly:

                      The collateral source rule bars a wrongdoer from
              offsetting his liability by insurance benefits independently
              procured by the injured party. . . . Under the collateral source
              rule, Graco would not be relieved of its duty to pay CRC’s
              attorney’s fees merely because CRC’s defense was provided by
              State Farm. Graco argues the collateral source rule does not
              apply because the issue does not concern who paid [the
              attorney’s] fees, but rather who incurred the fees. . . .

                     ....

                     We conclude that the collateral source rule applies to this
              case and, therefore, CRC incurred the legal fees and expenses
              that were provided by CRC’s insurance company. When CRC
              purchased insurance from State Farm, CRC paid State Farm to
              provide legal representation for CRC in such litigation.
              Chapman, although retained and paid by State Farm, provided
              services to State Farm’s insured, CRC, valued at
              $107,859.82. . . . Because the collateral source rule applies, we
              conclude the evidence supports the trial court’s finding CRC
              incurred $107,859.82 in legal fees and expenses in this cause.

Graco, 47 S.W.3d at 744-46 (internal citations omitted). Additionally, even though Graco

successfully had State Farm dismissed from the case, Graco also argued on appeal that

“because State Farm actually incurred the legal expense in this action, State Farm is the real

party in interest.” Graco, 47 S.W.3d at 746. The appellate court rejected the argument as

follows:

                      Graco contends State Farm should be allowed recovery
              only upon proving Graco’s liability in the underlying product
              liability case. . . .


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                     Graco’s argument is without merit. . . . [T]he trial court
              awarded judgment to CRC, not to State Farm. State Farm’s
              intervention was dismissed with prejudice. . . .

                      Moreover, we disagree with Graco’s premise that the
              claim for attorney’s fees necessarily belongs to State Farm. A
              claim for attorney’s fees belongs to the litigant, not to his
              attorney. . . . We likewise conclude, in this case, that the claim
              for attorney’s fees belongs to CRC rather than to State Farm.

Graco, 47 S.W.3d at 746-47 (internal citations omitted).



              The court in Fust v. Francois, 913 S.W.2d 38 (Mo. Ct. App. 1995), also

addressed the issue of the application of the collateral source doctrine to attorney’s fees paid

by an insurer in an underlying action. In Fust, the plaintiffs brought an action for malicious

prosecution against the defendants as a result of an earlier unsuccessful lawsuit that the

defendants had brought against them. The plaintiffs’ legal fees in the underlying action were

paid by an insurer. Even so, the plaintiffs obtained a judgment against the defendants that

included recovery of attorney’s fees incurred in the previous action. On appeal, the

defendants argued that the trial court committed error in granting the plaintiffs’ motion in

limine to exclude any testimony showing that the plaintiffs did not pay any attorney’s fees

in defending the underlying action. The defendants contended that insofar as the plaintiffs’

insurer paid the attorney’s fees, the plaintiffs should not have been allowed to recover the

same. The appellate court disagreed:

              [W]e find the court did not abuse its discretion in ruling the
              evidence inadmissible. The use of the collateral source rule was

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               recently articulated by the Missouri Supreme Court in the case
               Washington v. Barnes Hosp., 897 S.W.2d 611 (Mo. banc 1995).
               In Washington, the . . . court thoroughly reviewed the case law
               applying the collateral source rule and the underlying reasons
               for its application. One reason identified by the court and which
               applies to the present case is the “benefit of the bargain”
               rationale, i.e. the plaintiff who contracts for insurance with his
               or her own funds should receive that benefit without it being
               disclosed. . . . The common rationale for the rule is that a
               wrongdoer is not entitled to have the damages to which he is
               liable reduced by proving that plaintiff has received or will
               receive compensation or indemnity for the loss from a collateral
               source, wholly independent of him, or, stated more succinctly,
               the wrongdoer may not be benefited by collateral payments
               made to the person he has wronged. . . .

                       [The defendants] argue[] the evidence was not meant to
               get an offset or credit against damages but to rebut the
               [plaintiffs’] claim of the existence of damages—the fact of
               damages. It is well-settled that damages need not be proved
               with exact certainty, but rather it is the fact of damages, not the
               amount of damages, that must be proven with reasonable
               certainty. . . .

                      In the malicious prosecution context, there was testimony
               concerning the services of the law firm and the amount of those
               services. Such testimony is sufficient evidence of damages.
               Whether the [plaintiffs] were the ones who in fact paid the law
               firm directly for the services is irrelevant.

Fust, 913 S.W.2d at 47 (internal quotations and citations omitted). See also Worsham v.

Greenfield, 78 A.3d 358, 371 (Md. 2013) (“[W]e hold that a party compelled to defend him

or herself . . . may recover the costs associated with that litigation . . ., regardless of whether

those costs were paid by that party or by an insurance company or by another third person on

the party’s behalf.”); Otis Elevator, Inc. v. Hardin Constt. Co. Grp., Inc., 450 S.E.2d 41, 46


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(S.C. 1994) (applying collateral source rule to prevent defendant from “receiv[ing] the

benefit of an insurance contract for which [plaintiff] paid the premiums”).



              In the bankruptcy proceeding of In re EBW Laser, Inc., Nos. 05-10220C-7G

& 05-10221C-7G, 2012 WL 3490417 (Bkrtcy. M.D.N.C. Aug. 14, 2012), the Trustee of the

estate of two debtors sought damages from three respondents who had wrongfully sued the

Trustee while the bankruptcy proceeding was pending. The Trustee was seeking to recover

the attorney’s fees he had incurred in the respondents’ underlying wrongful lawsuit. The

respondents argued that the Trustee was not entitled to recover the attorney’s fees because

the fees were paid by an insurer. The bankruptcy court rejected the argument as follows:

                     The Respondents urge that the assessment of damages
              covering the fees . . . is unnecessary because the fees were paid
              by the malpractice insurance carrier for the Trustee and his law
              firm. This objection requires consideration of the collateral
              source rule. Under the collateral source rule, a plaintiff’s
              recovery will not be diminished by benefits received from a
              source independent of the wrongdoer. . . . . The policy
              underlying the rule focuses on the inherent unfairness of
              improving the defendant’s position through consideration of
              payments made independently to the plaintiff. . . . At least one
              bankruptcy court has determined that the collateral source rule
              applies to preclude diminishment of sanctions damages
              including attorney fees. In re Briggs, 143 B.R. 438, 463-64
              (Bankr. E.D.Mich. 1992). In Briggs, the creditor sought a
              reduction in the attorney fees assessed as sanctions based on the
              debtor having obtained legal representation pursuant to a legal
              services plan. . . . . The debtor had purchased the plan in
              advance of the bankruptcy as an employee benefit. . . . Invoking
              the collateral source rule, the court found that the sanctioned
              party should not benefit from the debtor having available

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              insurance obtained by the debtor through his employer. . . .
              These same considerations are applicable in this case. The
              Trustee and his law firm paid the price required to purchase
              malpractice insurance which was completely independent of the
              Respondents. The payments cited by the Respondents are the
              proceeds from a collateral source. Pursuant to the collateral
              source rule, the Respondents should not be relieved of
              responsibility for their wrongful conduct as a result of the
              payments which were in no way contributed to by the
              Respondents.

In re EBW, 2012 WL 3490417, at *19 (internal citations omitted). See also Broaddus v.

Shields, No. 08C4420, 2010 WL 4684033, *2 (N.D. Ill. 2010) (“[U]nder the collateral source

rule, the fact that Griffin Capital’s insurer may have paid certain attorney’s fees does not

absolve Broaddus from paying any such fees”[.]).



              The cases cited above did not involve a breach of a contract on the part of the

defendants to provide legal counsel for the plaintiffs in the underlying actions. This point

is critical because a majority of courts do not apply the collateral source rule to a breach of

contract claim in which a plaintiff seeks recovery of attorney’s fees paid by another insurer.

These courts have held that “[t]he collateral source rule, if applied to an action based on

breach of contract, would violate the contractual damage rule that no one shall profit more

from the breach of an obligation than from its full performance.” Pan Pacific Retail Props.,

Inc. v. Gulf Ins. Co., 471 F.3d 961, 973 (9th Cir. 2006) (internal quotations and citation

omitted). See also Bramalea California, Inc. v. Reliable Interiors, Inc., 119 Cal. App. 4th

468, 472 (Cal. Ct. App. 2004) (“[T]he collateral source rule applies to tort damages, not to

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damages for breach of contract.”).



              However, at least one court does, in fact, “apply the collateral source rule to

causes of action in contract, as well as to actions in tort.” Citizens Prop. Ins. Corp. v.

Hamilton, 43 So. 3d 746, 751 (Fla. Dist. Ct. App. 2010). For example, in Bangert v. Beeler,

470 So. 2d 817 (Fla. Dist. Ct. App. 1985), the plaintiffs brought an action against two

defendants after the defendants refused to provide them with legal representation in an

underlying action.1 The trial court found that the plaintiffs could not recover the attorney

fees paid in the underlying action because their insurer had paid for the same. The plaintiffs

appealed and argued that they should be allowed to recover the attorney’s fees paid by their

insurer. The appellate court agreed:

                      In Walker v. Hilliard, 329 So. 2d 44 (Fla. 1st DCA 1976),
              we held that the collateral source rule applies not only in tort,
              but also in contract. Thus, a tractor seller who breached the
              warranty of title was liable for the full amount of damages even
              though the buyer’s insuror paid the buyer for some of the
              damages. Here, the party that breached the warranty to defend
              title is likewise liable for the full amount of damages. The
              breaching party should not be rewarded when the wronged
              party’s collateral source is wholly independent of the breaching
              party.

                    At the oral argument on this case, counsel for
              [defendants] contended the collateral source rule should not


       1
       The underlying action involved property the plaintiffs had purchased from the
defendants. The defendants were contractually obligated to defend title to the property by
providing legal counsel for the plaintiffs.

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              apply because there is no evidence that the [plaintiffs] bought
              the title insurance policy, and that it was probably purchased by
              [someone else]. We have examined the record and find Mr.
              Bangert [plaintiff] testified, without contradiction, that he
              procured and paid for the policy.

Bangert, 470 So. 2d at 818 (emphasis added).



              In sum, the case law around the country is clear in holding that, in a tort action

arising from an underlying action, a plaintiff may recover attorney’s fees paid on his or her

behalf by an insurance company in the underlying action. Although a majority of courts

preclude such recovery on a breach of contract claim, at least one jurisdiction permits such

a recovery.



              In the instant proceeding, the record indicates that Morlan’s claims are based,

in part, upon statutory and common law bad faith causes of action. Our cases have made

clear that statutory and common law bad faith claims are tort actions. See Cava v. National

Union Fire Ins. Co. of Pittsburgh, Pa., 232 W. Va. 503, ___, 753 S.E.2d 1, 3 (2013) (“The

petitioners’ . . . complaint . . . set [sic] forth two tort causes of action: (1) common law ‘bad

faith’ and (2) violations of the West Virginia Unfair Trade Practices Act.”); Noland v.

Virginia Ins. Reciprocal, 224 W. Va. 372, 383, 686 S.E.2d 23, 34 (2009) (“The prior

decisions of this Court have clearly indicated that a common law bad faith claim sounds in

tort.”); Wilt v. State Auto. Mut. Ins. Co., 203 W. Va. 165, 167, 506 S.E.2d 608, 610 (1998)


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(“[T]his Court has previously determined that unfair settlement claims are tortious in

nature”); Syl. pt. 4, Poling v. Motorists Mut. Ins. Co., 192 W. Va. 46, 450 S.E.2d 635 (1994)

(“Violation of W. Va. Code, 33-11-4(9) [1985] is tortious conduct that may give rise to a

cause of action by a spouse for loss of consortium.”). Insofar as Morlan’s bad faith claims

are tort causes of action, under the majority rule in the country the collateral source rule

should be applied to allow Morlan to recover the attorney’s fees Westfield paid on its behalf

in the underlying case. Failure to appreciate the applicability of the collateral source rule to

the facts of this case demonstrates a patent lack of understanding of this most basic equitable

concept.



              In the final analysis, the dissent is absolutely wrong in arguing that Morlan

cannot recover the attorney’s fees paid by Westfield.



              For the foregoing reasons, I concur.




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