You can’t settle a bad faith claim against an insurer and recover attorney fees on top of the settlement.

On August 25, the Wisconsin Court of Appeals held that in the bad faith context, attorney fees are compensatory damages that were contemplated in the offer of judgment itself.

In 2000, an employee of Menards drove a truck into the home of Edley and Lurline Stewart, causing property damage and personal injuries.

The Stewarts had homeowners and automobile insurance through Farmers Insurance Group. Farmers tendered the Stewarts $805.97 as settlement of their personal property claims, but the Stewarts returned it as unreasonable.

The Stewarts then filed suit against both Menards and Farmers. They settled with Menards for $57,000, reserving the right to pursue more damages against Farmers.

An arbitrator found that, except for the $805.97 previously tendered, the Stewarts’ property damage claim against Farmers was barred by the statute of limitations; and that they were entitled to nothing for personal injury because their damages did not exceed $57,000.

The bad faith claim remained, however. Farmers made an offer of judgment of $5,000, plus taxable costs, which the Stewarts accepted.

The Stewarts then filed a notice of taxation with a bill of costs, seeking more than $46,000 in attorney fees and other costs. The trial court denied the request.

The Court of Appeals affirmed in an opinion by Judge Patricia S. Curley.

The parties agreed that attorney fees are “compensatory damages” in bad faith actions, but disputed whether that label affected the recovery.

Under sec. 807.01(1), a defendant may offer to allow judgment to be taken against it for the amount specified “with costs.” “Costs” include all fees allowed by law.

The court distinguished cases in which attorney fees are provided for by contract or by statute (consumer protection and civil rights laws), and thus could be recovered on top of the settlement.

Judge Neubauer explained, “By accepting Farmers’ $5,000 offer of judgment, the Stewarts acknowledged that that amount was sufficient compensation for their damages, inclusive of actual attorney fees. Consequently, we agree with Farmers that as damages resulting from the tort of bad faith, attorney fees do not remain attorney fees, but instead are transformed into damages.”

Citing Majorowicz v. Allied Mut. Ins. Co., 212 Wis. 2d 513, 537, 569 N.W.2d 472 (Ct. App. 1997), which contrasted attorney fees in a punitive damage award with those incurred in proving a bad faith claim, the court wrote, “Actual attorney fees in the context of a bad faith claim are not a necessary cost of litigation to which a prevailing party is entitled — instead, they are an item of damages intended to compensate the victims.”

The court also held that the Stewarts’ filing, service and arbitration fees were compensatory damages, and thus subsumed within the accepted offer of judgment.