Frankenmuth Mutual Insurance v. Keeley 433 Mich. 525

Archer, J.

We granted leave to appeal and cross-appeal to consider whether the trial court and the Court of Appeals correctly limited the nature and amount of damages that can be recovered by an insured when an insurer has breached its duty to settle a claim.

We hold that when an insurer has exhibited bad faith in failing to settle a claim on behalf of its insured, and a judgment in excess of the policy limits results, the insurer is liable for the excess without regard to whether the insured has the capacity to pay. Accordingly, we reverse the holding of the Court of Appeals and remand the case *529to the trial court for determination of damages in accordance with this opinion.

FACTS

On or about May 7, 1978, Joey Guy Boone was visiting his friend, Charles Keeley, at the residence of Charles’ mother, Mrs. Wilma Keeley. At some point during the day, Charles Keeley had placed his shotgun in open view in the living room. According to Joey’s statement to the police, Charles was "playing around with” the gun, the gun discharged, severely injuring Joey Boone. Joey Boone was rendered quadriplegic.

At the time of the shooting, Charles Keeley was insured with Frankenmuth Mutual Insurance Company.1 The policy provided coverage for Charles through his mother’s contract of insurance.

In an effort to avoid the initiation of a lawsuit, settlement negotiations were conducted between counsel for Mr. Boone and counsel for the Keeleys, but no agreement was reached. As a result, on June 8, 1979, Joey Boone filed a negligence action *530against Charles Keeley and his mother, Wilma, in Genesee Circuit Court.

On the same date, Frankenmuth sought a declaratory judgment that the injury to Mr. Boone was "expected or intended from the standpoint of the insured.”2 Frankenmuth asserted, therefore, that Charles Keeley’s shooting of Joey Guy Boone was not covered under the policy.3

Joey Boone and the Keeleys, having joined forces, counterclaimed, charging that the insurance company had refused, in bad faith, to settle the case, despite several oifers made by Joey Boone’s attorney to compromise for the policy limits, $50,000. They further alleged that Frankenmuth fraudulently and deceitfully represented to Boone’s attorney that the policy limit was only $25,000. The countercomplaint requested any damages deemed appropriate by the court._

*531On July 6, 1981, the circuit court determined that Frankenmuth was responsible under the policy provisions to defend and, if appropriate, settle on behalf of the Keeleys. Meanwhile, in the principal case, the jury found Charles Keeley and Joey Boone equally negligent with total damages equaling $500,000. Thus, a judgment was entered against Charles Keeley in the net amount of $250,000, plus interest and costs.

Thereafter, Joey Boone and the Keeleys initiated an action to have their counterclaims brought to trial. Frankenmuth responded with a motion for summary disposition regarding each of the claims.4 In resolving the motion, the court awarded Wilma Jean Keeley $4,152 in attorney fees. In so doing, the court simultaneously ruled that Frankenmuth exhibited bad faith in failing to settle the case.5 More importantly, however, the court held that *532any damages owing to Charles Keeley with respect to Frankenmuth’s breach of its duty to settle were necessarily limited to the amount that the injured party, Joey Boone, would have been able to recover from Charles Keeley absent the insurance coverage, i.e., the amount of Mr. Keeley’s assets not exempt from legal process.

The Court of Appeals, in a unanimous decision, affirmed the ruling of the lower court in all respects.6 However, the Court remanded the case for a determination of the extent of Charles Keeley’s assets not exempt from legal process, and for entry of judgment against Frankenmuth in that amount. We subsequently granted leave to appeal.7

i

The substantive issue brought before the Court by the appellant, Charles Keeley, was acknowledged in this state six decades ago. Wakefield v Globe Indemnity Co, 246 Mich 645; 225 NW 643 (1929), involved an action brought by the City of Wakefield against its liability insurer, Globe In*533demnity, for the company’s failure to exercise reasonable care in effecting the compromise of a tort claim brought against the city,8 and for the company’s bad faith in refusing settlement.9

With regard to the specific question whether Globe Indemnity had to pay the excess judgment, the Wakeñeld Court did not have the opportunity to directly answer. In dealing with the bad-faith issue first,10 the Court ruled that the insurer was *534not liable to its insured for refusal to settle unless refusal was in bad faith. Hence, because the Court did not view the actions of Globe Indemnity as constituting bad faith, it reversed the trial court, remanding for judgment in favor of Globe, leaving the damage issue substantively undecided.11

Nonetheless, within its text, Wakeñeld recognized the issue addressed in the case at bar:

The courts seem to be unanimous in the opinion, as expressed by direct ruling, recognition, or assumption, that the insurer is liable to the insured for an excess of judgment over the face of the policy when the insurer, having exclusive control of settlement, fraudulently or in bad faith refuses to compromise a claim for an amount within the policy limit. [Wakefield, supra at 648.]

In the years that followed, Wakefield supplied the standard upon which courts in Michigan relied when facing allegations of bad-faith failure to settle on the part of insurance companies. In Commercial Union Ins Co v Medical Protective Co, 426 Mich 109, 116; 393 NW2d 479 (1986), this Court cited Wakeñeld, reasoning:_

*535[A]n insurer is liable to its insured for a judgment exceeding policy limits when the insurer, who has exclusive control of defending and settling the suit, refuses to settle within policy limits in "bad faith.”[12]

ii

There are two schools of thought regarding the remedy for an insurer’s bad-faith breach of its duty to settle. The jurisdictional split is distinguished by the following doctrines: the prepayment rule and the judgment rule. The older prepayment rule is the doctrine, adopted by a minority of jurisdictions, which dictates that an insurer may be held liable in an "excess” case only if part or all of the judgment has been paid by the insured. The judgment rule, adopted by a majority of jurisdictions, commands an insurer to pay an excess judgment in instances of bad faith, so that the insured need not make any payment nor have the capacity to pay any part of the judgment in order to recover the excess amount from the insurer. See Carter v Pioneer Mutual Casualty Co, 67 Ohio St 2d 146; 423 NE2d 188 (1981).

The cases relied on by the appellants clearly reveal the vigorous dichotomy of the courts in their analyses of the doctrines. For example, in Wolfberg v Prudence Mutual Casualty Co, 98 Ill App 2d 190, 196; 240 NE2d 176 (1968), the Court recited:

The majority view in this country is represented by Jenkins v General Accident Fire & Life Assur*536anee Corp, 349 Mass 699 [703]; 212 NE2d 464, 467 (1965), which stated:

"Despite some conflict in earlier cases, the weight of authority is that it is not necessary for the insured to allege that he has paid or will pay a judgment in excess of the policy limits in an action against the insurer for breach of its duty to act in good faith . . . .”[13] [Citations omitted.]

The court in Purdy v Pacific Automobile Ins Co, 157 Cal App 3d 59, 74; 203 Cal Rptr 524 (1984), *537expressed the deterioration of the minority viewpoint:

The "prepayment rule” has in fact been relegated to the past in a majority of American jurisdictions, due primarily to the perceived inequity of an insurer’s being permitted to capitalize on the weakened financial condition of the insured .... In California, damages in the amount of the excess judgment are, without further demonstration, the measure of recovery for bad faith failure to settle.

In Dumas v State Farm Mutual Automobile Ins Co, 111 NH 43, 45; 274 A2d 781 (1971), the New Hampshire Supreme Court reasoned that the prepayment rule could no longer be considered fair or judicious:

A policy argument against our present rule is that it serves as a windfall to an insurer fortunate enough to have insured an insolvent. (Citation omitted.) In any event the statement that an insured has not been damaged because he cannot pay the excess judgment is based upon the fallacy that damaged credit and financial ruin are not injuries.[14]

*538Conversely, the United States Court of Appeals for the Second Circuit argued against the judgment rule and its accompanying theories in Harris v Standard Accident & Ins Co, 297 F2d 627 (CA 2, 1961). That court did not agree with the notion that insurers would receive a windfall upon a declaration of bankruptcy by its insured. The court opined that an insurer receiving premiums upon the face amount is subject to payment of that amount regardless of the insured’s financial condition. Further, the court attempted to rebut the notion that adoption of the prepayment rule would make insurers less responsive to its duty to settle (because the insurer could avoid liability when its insured was insolvent), by stating that only a very small percentage of cases unfold with such factual parameters. Primarily, the court did not construe the risk or actual burden of paying an excess judgment as a result of an insurer’s failure to settle as constituting actionable damages to the insured. Accordingly, the court declined to rule that the insurer was responsible for payment of an excess judgment. See also Dumas v Hartford Accident & Indemnity Co, 92 NH 140; 26 A2d 361 (1942); Universal Automobile Ins Co v Culberson, 126 Tex 282; 86 SW2d 727 (1935); Seguros Tepeyac v Bostrom, 347 F2d 168 (CA 5, 1965); Smith v Transit Casualty Co, 281 F Supp 661 (ED Tex, 1968).15

III

A

Insurance is an agreement whereby parties give *539valuable consideration for protection from and indemnification against loss, damage, injury or liability. As servants of the public, insurance companies are held to the universally high standard of "good faith.” See 7C Appleman, Insurance Law & Practice, § 4711. Anything less should not be tolerated. Accordingly, we adopt the rule which mandates that if an insurer engages in bad faith while failing to settle a claim, it must compensate the insured, regardless of financial status.

Although the prepayment rule allows for a recovery by the insured in instances of bad-faith failure to settle, the amount of the recovery is directly dependent upon the financial status of the insured, i.e., if an insured has no assets, the insurance company is not obligated to pay any part of an excess judgment. Thus, under this rule, an insurer is permitted to capitalize on the weakened financial condition of the insured. See Purdy, supra.

The major flaw in the prepayment rationale is the fact that when an insurer is "fortunate enough to have insured an insolvent,” Dumas, supra at 45, there is no consequence for its deliberate failure to meet the good-faith standard. The judgment rule eliminates the insurer’s ability to hide behind the financial status of its insured. Hence, adoption of the judgment rule is the most effective way to underscore our serious concern with bad-faith practices in the insurance industry.

B

We acknowledge that the potential injury to an insolvent insured is great. In the case at bar, *540Charles Keeley earns a weekly salary of $150,16 and is in no position to pay the $200,000 excess judgment against him. Despite the charge made in Harris, supra, that situations like the instant one are rare, Mr. Keeley’s position is neither presently nor prospectively uncommon.

As noted previously, a minority of courts has asserted that an insured suffers no actionable damages when an insurer breaches its duty of good faith in settling claims. We, however, are in express agreement with the majority of jurisdictions that has held that an insured person with little or no assets suffers injury when an excess judgment is obtained against him. Such a judgment will potentially impair his credit, force him into bankruptcy, diminish his reputation, subject his outright property to lien, and immediately subject any future earnings to possible garnishment. See, generally, Carter v Pioneer Mutual Casualty Co, supra. Such injuries do constitute actual damages in the most traditional sense.17

An insurer cannot be allowed to flagrantly neglect the interests of its insured without facing serious consequences. There is, in this case, a direct cause and effect relationship between the bad-faith failure to settle and the entry of the excess judgment. Therefore, the insurer is responsible for paying the excess.

Worthy of reemphasis is the premise set forth in Wakeñeld many years ago. When a liability in*541surer has sole power and control over the litigation of claims brought against its insured, which includes the obligation to compromise the claim if feasible, then counsel must proceed in good faith. This mandate of good faith does not encompass the notion that counsel should settle any and all claims, so that failure to do so is equivalent to bad faith, for

"[i]t is not bad faith if counsel for the insurer refuse settlement under the bona fide belief that they might defeat the action, or, in any event, can probably keep the verdict within the policy limit. ... A mistake of judgment is not bad faith.” [Wakefield, supra at 656.]

However, upon the determination that an insurer failed to settle in deliberate bad faith,18 such subterfuge cannot be rewarded by allowing the insurer to escape compensating its insured for this avoidable situation. Accordingly, as the measure of damages has been established by a majority of jurisdictions to be payment of the foreseeably resultant excess, we likewise adopt this judgment rule, as it serves to explain and extend previously existing precedent in our state.

iv

The appellee-insurer argues that this case should be governed by Stockdale v Jamison, 416 Mich 217; 330 NW2d 389 (1982). Stockdale involved an automobile accident between Mr. and Mrs. Stockdale and Wayne Jamison. Jamison was insured for $20,000 by Farm Bureau Insurance Group. The issue in the case involved whether the Stockdales could recover a $160,000 judgment from *542Jamison’s insurance company, as a result of its failure to defend the claim on his behalf. The Court’s principal holding was that "ordinarily an insurer’s liability for breach of its contractual duty to defend its insured is limited to an amount equal to the insured’s assets not exempt from legal process.” Id. at 228. As a result, the plaintiffs were denied recovery of the excess judgment.

The concern with this case lies within n 15 of the opinion:

Professor Keeton has suggested that this is an appropriate measure of damages for an insurer’s breach of its duty to settle. Keeton [Insurance Law], § 7.8(f), p 516. As Professor Keeton points out, this approach has the advantage to both parties of eliminating the need for the insured (and consequently, the plaintiff) to suffer the costs of a bankruptcy proceeding in order to establish the actual amount of loss.

See also Harris v Standard Accident & Ins Co [supra], (no recovery for bad faith failure to settle, where insured was insolvent before the entry of an excess judgment, and bankrupt afterwards); Dumas v Hartford Accident & Indemnity Co [supra], where the court said:

"The mere existence of an outstanding judgment, which may never be paid, is not a legal injury, for the essence of the injury in such a case is pecuniary loss. State Automobile Mutual Ins Co of Columbus, Ohio v York, 104 F2d 730, 734 (CA 4, 1939). What the plaintiff owes may reduce the appearance of his net worth on an accountant’s balance sheet, but unless he pays his debt he is not out of pocket.”

Professor Keeton did not discuss taking the same approach in the failure to defend context, possibly because he did not consider that an insurer might be liable above policy limits for a judgment against an insured who is unable to mitigate his damages by obtaining counsel. Keeton, supra, § 7.6(e), p 484. [Stockdale, supra at 228.]

*543The Stockdale Court’s inclusion of this footnote was not intended to be a perch beneath which several decades of precedent were to fall.19 The ampleness of Michigan case law preceding Stock-dale on this issue makes clear this jurisdiction’s preference for holding insurers liable for excess judgments in instances of bad-faith failure to settle.20 Stockdale addressed an insurance company’s failure to defend its insured, and any application of its findings should be applied solely to cases of failure to defend.21

*544CONCLUSION

In adopting the judgment rule, we hold that when an insurer has exhibited bad faith in failing to settle a claim on behalf of its insured and a judgment in excess of the policy limits results, the insurer must pay the excess judgment in its entirety without regard to whether the insured has the capacity to pay. Accordingly, we reverse the holding of the Court of Appeals and remand the case to the trial court for a determination of damages in accordance with this opinion.

Riley, C.J., concurred with Archer, J.

Cavanagh, J.

{concurring). I join in my Brother Archer’s decision to apply the judgment rule in this case, but do not join its dicta rejecting that rule in the failure to defend context. In my view, our decision today and our decision in Stockdale v Jamison, 416 Mich 217; 330 NW2d 389 (1982), are incompatible.

Boyle, J.

(concurring). Although I concur in Justice Archer’s decision to adopt, as a majority of jurisdictions have, the "judgment rule” of insurer liability where an insurer’s bad-faith failure to settle a claim results in a judgment against an insured in excess of the policy limits, I write separately in order to emphasize the narrowness of this ruling.

I read Justice Archer’s majority opinion as addressing only the question of the proper measure of damages recoverable once a claim of bad-faith failure to settle has been established. The opinion does not, as I understand it, pass upon the propriety of the trial court’s finding in this case of bad faith on defendant’s part, nor on the propriety *545of the Court of Appeals affirmance of that finding.1 Its failure to do so is the necessary result of our limited grant order in this case, which directed the parties to address only the question whether the trial court and Court of Appeals properly limited the nature and amount of damages available to Charles Keeley as counterplaintiff in this case. 430 Mich 857 (1988).

Thus, in my view the opinion should not be seen as establishing a new definition or standard of bad faith in such cases, nor, for that matter, as applying an existing definition or standard of bad faith. See, e.g., Commercial Union Ins Co v Liberty Mutual Ins Co, 426 Mich 127; 393 NW2d 161 (1986); City of Wakefield v Globe Indemnity Co, 246 Mich 645; 225 NW 643 (1929). The question whether bad faith was properly shown under these circumstances is simply not before this Court.2

1 write also to express my agreement with Jus*546tice Archer that today’s decision is not, as Justice Cavanagh states, necessarily "incompatible” with our decision in Stockdale v Jamison, 416 Mich 217; 330 NW2d 389 (1982). There are, as the majority aptly points out, a number of differences between "failure to defend” and "failure to settle” cases. This opinion should not be seen as affecting the continuing viability of the Stockdale rule with respect to failure to defend cases.

Levin, J.

(dissenting). The question presented concerns the assessment of damages in an action against an insurer for refusing in "bad faith” to settle within policy limits.1

The Court of Appeals — on the authority of this Court’s decision in Stockdale v Jamison, 416 Mich 217; 330 NW2d 389 (1982),2 and its earlier decision, applying Stockdale, in Sederholm v Michigan Mutual Ins Co, 142 Mich App 372; 370 NW2d 357 (1985) — held that the "measure of damages in a breach of a duty to settle is limited to the assets of *547the assignor not exempt from legal process,” and remanded for a determination of the extent of the assets of Charles Keeley not exempt from legal process.3

The majority would limit Stockdale to a case, such as Stockdale, of a failure to defend and would not extend or apply the principle there stated to a case where, as here, it is alleged that the insurer refused in bad faith to settle. We would apply Stockdale in this failure-to-settle case.

i

Charles Keeley pointed a shotgun at Joey Guy Boone and pulled the trigger. Boone was rendered quadriplegic.

Keeley was an insured under a homeowner’s insurance policy issued by Frankenmuth to his mother, Wilma Jean Keeley. The policy provided coverage for bodily injury except "bodily injury or property damage which is either expected or intended from the standpoint of the Insured” with a limit of $50,000.4 Frankenmuth asserted that the exception from coverage was applicable.

A lawyer retained by Mrs. Keeley to represent her son in criminal proceedings5 resulting from the incident and a lawyer retained by Boone to pursue his personal injury claim demanded that Frankenmuth tender the policy limits to settle Boone’s claim. Boone’s lawyer wrote Keeley’s lawyer and Frankenmuth advising that unless policy limits were tendered by December 1, 1978, a tort "suit will be filed against the Keeleys and my clients *548will seek their full measure of damages and will not feel bound by the limits of the liability policy held with [Frankenmuth] and will look to any and all holdings of the Keeleys to satisfy any resulting Judgment.”

Frankenmuth responded offering to settle for $20,000 and indicated that if the offer was rejected it would file a declaratory judgment action regarding the coverage dispute. The offer was rejected.

A tort action was commenced against Keeley on December 22, 1978.6 Frankenmuth offered to settle for $25,000 on January 18, 1979, but that offer was rejected.7 Frankenmuth provided a defense for Keeley under a reservation of rights.

Frankenmuth commenced an action on June 8, 1979, for a declaratory judgment against Keeley and Boone. The defendants filed a counterclaim against Frankenmuth for bad-faith failure to settle.

There were thus three separate claims: the tort action against Keeley, the declaratory judgment action against Keeley and Boone, and the bad-faith claim against Frankenmuth.

The first action to be tried was the declaratory judgment action. Following a bench trial on July 6, 1981, the judge entered an order finding that there was coverage. The judge said that he was satisfied that Keeley intentionally pointed the shotgun at Boone and pulled the trigger, but Frankenmuth had "failed to bear the burden of *549proof of showing that he intended the result,” and found that there was coverage.

The judge denied a request for attorney fees8 stating that there were disputed "questions of fact upon which reasonable minds could differ.”

On July 2, 1981, Frankenmuth offered the policy limits of $50,000, but this offer was rejected. Frankenmuth filed an offer of judgment on September 2, 1981, for $50,000 plus all taxable interest and costs to date, which was rejected. Frankenmuth accepted in behalf of Keeley, but Boone rejected the October, 1981 offer, a mediation valuation of $50,000.

The tort action came to trial in mid-1982, nine months after Frankenmuth had filed the offer of judgment. The jury found that Boone had suffered damages of $500,000, but that he was fifty percent comparatively negligent. A judgment was entered against Keeley for $250,000 plus prejudgment interest to the date of the verdict in the amount of $84,890. Frankenmuth tendered $66,978 in partial payment of the judgment — the policy limits of $50,000 and interest of $16,978.

After the tort action had been tried to verdict, the Keeleys and Boone entered into an agreement concerning Keeley’s bad-faith claim against Frankenmuth. The lawyer representing Keeley in the instant appeal was substituted as counsel for both Boone and Keeley. Boone agreed to forbear any action to collect on the judgment he had obtained against Keeley. Keeley agreed to pay Boone sums recovered on the claim. Boone was authorized to accept or reject any settlement offer made by Frankenmuth and any settlement would be apportioned ninety-five percent to Boone and five percent to the Keeleys.

*550Before trying the bad-faith claim, the court entered an order on June 20, 1985, granting Frankenmuth’s motion for summary judgment respecting all items of damages claimed by the Keeleys except attorney fees incurred by Mrs. Keeley. The ruling was based on this Court’s decisions in Stockdale and Kewin v Massachusetts Mutual Life Ins Co, 409 Mich 401; 292 NW2d 50 (1980). The court found on December 3, 1985, that there was a question of fact on which reasonable minds could differ concerning attorney fees Mrs. Keeley claimed were incurred as a result of "alleged bad faith” on the part of Frankenmuth in handling Boone’s claim.

At a hearing on December 6, 1985, the judge found that Frankenmuth’s handling of the case had inadequately protected Mrs. Keeley’s interest and was in bad faith, with the result that she had incurred legal expenses that she would not have otherwise incurred. The offer of judgment in the amount of $50,000 plus interest was, said the judge, "too late to save costs.” (Emphasis added.) A judgment was entered for $4,152 plus interest in respect to the attorney fees incurred by Mrs. Keeley.9_

*551It appears that there is a substantial question whether the judge found, or would find, that there was a causal relationship between the bad-faith conduct that he found in the handling of the claim and the loss claimed by Keeley resulting from the entry of the judgment in the amount of $250,000. Frankenmuth asserts that the judgment of $4,152 was for "the only damage which actually flowed from the bad faith conduct found by that Court. It found that Frankenmuth’s attorney’s failure to properly delineate his role had caused Franken*552muth’s insured, Wilma Jean Keeley, to incur expense in securing the representation of a second defense attorney.10 That expense was the damage caused by the particular breach, and it was awarded. However, the excess judgment was not causally related to, and did not naturally flow from, the particular breach of the insurance contract involved in this case.”

Keeley asserts that Frankenmuth did not raise those contentions in the Court of Appeals.11 On appeal in the Court of Appeals, Frankenmuth did, however, argue that the evidence did not establish bad faith.12 The Court of Appeals did not reach that question.

It is unclear whether the judge found bad faith in failing to offer policy limits before the declaratory judgment action was decided against Frankenmuth. The judge’s findings on the earlier attorney fees issue13 suggests that he might not have found bad faith in failing to offer policy limits before they were offered. The judge might have thought that he had no need to decide at the December 6, 1985, hearing whether the failure to offer policy limits earlier was of any importance because he had already decided, on June 20, 1985, that Stockdale and Kewin precluded any recovery other than the amount that he ultimately awarded for unnecessarily incurred attorney fees._

*553We would remand the cause to the trial judge for a determination of whether there was bad faith in failing to offer policy limits before the judge rendered his decision in the declaratory judgment action.14

II

We agree with the majority that the prepayment rule, requiring an insured to have made some payment on the judgment, is unsound and that the judgment rule is in general the better approach.15 An insured should not be required to *554sell assets or borrow money to pay a judgment in order to maintain an action against the insurer for bad faith in failing to settle a claim within policy limits.

Adoption of the judgment rule approach does not, however, justify eliminating the sense of the prepayment rule that the insurer should not be required to pay more than the insured is able to pay on the judgment. We agree with Chief Judge Fuld of the New York Court of Appeals who said:

I do not suggest — although there are a number of decisions so holding — that an insured must pay the judgment before he, or another on his behalf, is able to proceed against a bad faith insurer. However, there must be some showing that he has been damaged. In the case before us, there is not the slightest evidence, or even intimation, that the insured was harmed by the judgment, that he had any assets which were imperiled or that either his reputation or credit was impaired.

In short, the complaint in this case should be dismissed not only because there is no evidence that the insurer acted in bad faith but also because there is no proof that the insured suffered any damage. [Gordon v Nationwide Mutual Ins Co, 30 NY2d 427, 441; 285 NE2d 849 (1972). Emphasis added.][16]_

*555Judge Keeton has expressed the following view:

When it seems almost certain the insured will never pay anything at all on the excess judgment if the claim against the insurer is denied, arguments that the insured has been damaged by the increase in debts are rather weak support for any cause of action at all, much less for a measure of damages equal to the amount of the increase in the insured’s debts. However, other courts have concluded that the entry of judgment against a person constitutes a loss and that the insured’s "loss does not turn on whether the judgment has been satisfied.” Since, absent a discharge of the obligation through a bankruptcy proceeding, the third party’s judgment can remain as an outstanding obligation for extended periods of time, in many circumstances there is considerable uncertainty in regard to predicting whether the insured may ultimately have resources or assets that may be taken to satisfy some portion of the judgment.

Third party claimants are not in a position to assert that they were harmed as a result of the insurer’s conduct in regard to having not settled *556the tort claim. The insurer’s duty was to the insured, not to the claimant. Furthermore, in one sense, a third party benefits from the insurer’s refusal to settle because the insurer’s refusal to settle resulted in the claimant’s obtaining a judgment in excess of the amount the claimant had offered to accept in settlement. Thus, although the third party claimant deserves further compensation, the theoretical justification for imposing liability on the insurer, which is harm to the insured, does not warrant a recovery by such a claimant any more than the innocent victims of an under-insured tortfeasor would be entitled to indemniñcation beyond the amount of the applicable coverage from a liability insurer who had not refused a settlement. [Keeton & Widiss, Insurance Law, § 7.8(i)(l), pp 899-900. Emphasis added.]

The majority would hold that Frankenmuth is liable for the $200,000 excess of the judgment over policy limits — now, with interest, over $600,000— "without regard to whether the insured has the capacity to pay”17 and thus without any evidence or finding that Keeley suffered pecuniary loss in that amount. The stated rationale in the lead opinion is that this will "underscore our serious concern with bad-faith practices in the insurance industry.”18

Until now, the rule in Michigan has been that the action for bad-faith failure to settle sounds in *557contract and not in tort.19 Contract damages seek to place the aggrieved party in the same economic position he would have been had the contract been performed.20 It is well established that as a general rule no damages will be awarded for the mental distress or emotional trauma that may be caused by breach of contract.21

The "system of contract remedies” is not directed at compulsion of promisors to perform, its aim rather is relief to promisees to redress breach. The objective is not to cause promisors to perform, but rather to encourage promisees to rely on promises, and this is done by securing the "expectation interest”22 through awarding damages for *558the economic loss suffered by the promisee.23

As stated in the lead opinion, the Supreme Court of New Hampshire reasoned that the prepayment rule could no longer be considered fair or *559just because "it serves as a windfall to an insurer fortunate enough to have insured an insolvent,” and the concept that an insured has not been damaged because he cannot pay the excess judgment is based on the fallacy that damaged credit and financial ruin are not injuries. Dumas v State Farm Mutual Automobile Ins Co, 111 NH 43, 45; 274 A2d 781 (1971).

Damaged credit and financial ruin are, we agree, economic loss and compensable. If Keeley could demonstrate that his credit had been damaged or he had suffered financial ruin, then he should no doubt recover for such economic loss caused by breach of contract. It does not appear on this record, however, that Keeley’s credit has been damaged to the extent of over $600,000.

There should not be any concern about a so-called windfall to an insurer. Contract damages are generally measured by the loss to the promisee, not the loss or gain to some other person.24

In Michigan, in contrast with a number of other states, damages in contract (and also in tort) are compensatory. In other states, mental distress and punitive damages are recoverable.25 In those legal climates, concerns about windfalls to insurers and insurance industry practices have led the courts to *560ignore the difference between the measure of damages in a contract action and in a tort action, and to allow recovery for mental distress and punitive damages for bad-faith failure to settle.26

Although not expressly stated in the lead opinion, since the over $600,000 recovery is awarded without proof that Keeley incurred economic loss, this Court will for the first time have departed from the principle of confining the damages for breach of contract by an insurer to the economic loss suffered by the promisee.

In Kewin v Massachusetts Mutual Life Ins Co, 409 Mich 401, 421; 295 NW2d 50 (1980), this Court declined to recognize an action for bad-faith breach of an insurance indemnity contract and ruled that "absent allegation and proof of tortious conduct existing independent of the breach, . . . exemplary damages may not be awarded in common-law actions brought for breach of a commercial contract.”

In Friedman v Dozorc, 412 Mich 1; 312 NW2d 585 (1981), this Court declined to expand the tort remedy of malicious prosecution by eliminating the special injury requirement in a countersuit commenced by physicians against lawyers who had previously unsuccessfully brought a malpractice action against them.

In Roberts v Auto-Owners Ins Co, 422 Mich 594; 374 NW2d 905 (1985), this Court reversed a judgment for mental distress damages of $2,500 awarded for outrageous claims processing, stating that the threshold requirements of proof to make out a prima facie case of intentional infliction of *561emotional stress had not been established, and declined to address the question whether the tort of intentional infliction of emotional distress would be recognized in the insurance claims processing or other contexts.

In Commercial Union Ins Co v Medical Protective Co, 426 Mich 109, 126; 393 NW2d 479 (1986), this Court held that a primary insurer did not owe a duty to an excess insurer to act in good faith to settle a claim against the insured and that the excess insurer’s cause of action against the primary insurer is as an equitable subrogee of the insured. In so holding, a majority declined to join in footnote 5 of the lead opinion, which indicated that there might be a direct duty of good faith and due care "from a primary insurer toward an excess insurer” — and, on that analysis, possibly to an injured person such as Boone. In so holding, the majority stated that there was "no convincing legal precedent or reasoning and no policy considerations which would lead [the majority] to determine that such an expansion of traditional tort doctrine is appropriate in these circumstances.”

In Young v Michigan Mutual Ins Co, 139 Mich App 600, 606; 362 NW2d 844 (1984), the Court of Appeals ruled that the Uniform Trade Practices Act, requiring timely payment of claims to insureds and designating certain activities to be unfair competition or unfair or deceptive acts or practices, did not provide a private cause of action in tort for violation of the provisions of the act, and said:

Plaintiff also claimed that a private cause of action is implied by MCL 500.2026; MSA 24.12026. This claim was rejected by the Michigan Supreme Court in Shavers v Attorney General, 402 Mich 554, 604, n 27; 267 NW2d 72 (1978), cert den sub *562nom Allstate v Kelley, 442 US 934; 99 S Ct 2869; 61 L Ed 2d 303 (1979). The Michigan Supreme Court noted that isolated incidents do not constitute unfair trade practices under MCL 500.2026; MSA 24.12026, MCL 500.2027; MSA 24.12027. There can be no independent cause of action in a particular insurance client since an insurance client’s dealings with an insurance company are of necessity an isolated incident. MCL 500.2026; MSA 24.12026 is designed to give the Commissioner of Insurance authority over certain continuing practices of insurance companies. See MCL 500.2028 et seq.; MSA 24.12028 et seq. The insured does not have an independent cause of action under MCL 500.2026; MSA 24.12026.

Upon adoption of the majority view, counsel for plaintiffs could argue that Michigan no longer restricts plaintiffs claiming bad-faith settlement practices to recovery of pecuniary loss and has recognized a kind of hybrid cause of action sounding in contract, but actually allowing recovery of losses akin to punitive damages.

in

We would accept the judgment rule insofar as it dispenses with the need to establish that Keeley paid any amount on the judgment and would, as did the Court of Appeals, remand to the trial court for a determination of the extent of Keeley’s assets not exempt from legal process27 and, additionally, *564for a determination of the value of the excess portion of the judgment — now over $600,000 including accrued interest plus additional interest as it accrues — taking into account not only Keeley’s assets not exempt from legal process but also his *565prospects of attaining in the future additional assets from which the judgment could be collected.28

We thus propose a compromise between the prepayment and the judgment rule: that this Court accept the essence of the judgment rule by eliminating the need to show partial payment, but provide protection for insurers along the lines of the prepayment rule by precluding collection on the judgment from the insurer beyond what is or would actually be collectable from the insured.

IV

Frankenmuth was prepared to settle Keeley’s claim for policy limits nine months before trial and offered to have a judgment entered for that amount plus interest. That offer was declined in the hope that a greater judgment would be awarded, and that a sympathetic judge or jury would find bad faith in Frankenmuth’s failure to offer policy limits before resolution of the question whether Frankenmuth was subject to any liability.

*566Frankenmuth argued in the Court of Appeals that the evidence did not establish bad faith. The Court of Appeals agreed with Frankenmuth on other grounds and did not reach that issue. The majority did not reach that issue.

When we reverse the Court of Appeals and it failed to reach alternative issues raised in that Court by the appellee in this Court, we invariably remand to the Court of Appeals so that it can consider the alternative issues advanced by the litigant who prevailed in the Court of Appeals but lost in this Court except in those cases where we address the alternative issues.29

The majority should add such a direction for remand to the Court of Appeals to consider issue(s) raised in but not addressed by that Court.

On remand, Frankenmuth would have the opportunity to argue that there is inadequate evidence to support, and it would have been clear error to find, the factual hypothesis for reversal advanced by the majority that Frankenmuth "flagrantly neglect[ed]” the interest of its insured and was guilty of "deliberate bad faith”30 in failing to offer policy limits before it did.

v

In a separate opinion, one of the justices comprising the majority appears to distance herself somewhat from the result, stating:

I read Justice Archer’s majority opinion as addressing only the question of the proper mea*567sure of damages recoverable once a claim of bad-faith failure to settle has been established. The opinion does not, as I understand it, pass upon the propriety of the trial court’s finding in this case of bad faith on defendant’s part, nor on the propriety of the Court of Appeals affirmance of that finding. Its failure to do so is the necessary result of our limited grant order in this case, which directed the parties to address only the question whether the trial court and the Court of Appeals properly limited the nature and amount of damages available to Charles Keeley as counterplaintiff in this case. 430 Mich 857 (1988).

Thus, in my view the opinion should not be seen as establishing a new definition or standard of bad faith in such cases, nor, for that matter, as applying an existing definition or standard of bad faith. See, e.g., Commercial Union Ins Co v Liberty Mutual Ins Co, 426 Mich 127; 393 NW2d 161 (1986); City of Wakefield v Globe Indemnity Co, 246 Mich 645; 225 NW 643 (1929). The question whether bad faith was properly shown under these circumstances is simply not before this Court. [Ante, pp 544-545.]

The foregoing statement underscores our concern that there may have been clear error in finding, if the judge did find, bad faith or inadequate evidentiary support for such a finding or for entry of a judgment exceeding $600,000 against Frankenmuth.

In stating "that the trial court did make a finding of bad faith in this case,”31 the concurring justice opines respecting the issue which she acknowledges "is simply not before this Court.”32 The further statement that the remand ordered by the Court of Appeals implied that the Court of Appeals considered and rejected Frankenmuth’s "argument on appeal that bad faith had not been *568established”33 assumes that the Court of Appeals considered this issue although the opinion of the Court of Appeals contains nary a word indicating that it did in fact consider the issue. Absent any statement or even allusion in the opinion of the Court of Appeals indicating that it did consider the issue, it appears that the Court of Appeals failed to focus on the need to consider this issue.

The conclusion, on the basis of implication, that the Court of Appeals considered and rejected, albeit without a word, the sufficiency of the evidence/clear error in fact-finding issues suggests at least that its treatment of these issues was cursory.34 On that basis, also, the majority should remand for plenary consideration of these issues, especially in light of the reservation regarding the sufficiency of the evidence/clear error in fact-finding issues suggested in the quoted two paragraphs of the concurring opinion.

Brickley and Griffin, JJ., concurred with Levin, J.

APPENDIX

The following is the text of the unpublished *569opinion of the Court of Appeals in the instant case, except so much of the opinion as states the facts and history of the proceedings preceding reference to the trial court’s decision on the bad-faith claim:

Before: E. A. Weaver, P.J., M. J. Kelly and J. R. Kirwan, JJ.*

Per Curiam.

The trial court granted in part Frankenmuth’s motion for summary disposition on the counterclaims. However, the trial court found that Frankenmuth was guilty of bad faith in its handling of the claim, and awarded judgment in the amount of $4,152 plus interest, on Wilma Keeley’s claim for attorney fees. Appellants now appeal the dismissal of the counterclaim.

Appellants’ first issue on appeal is that the trial court erred in applying the rule of Stockdale v Jamison, 416 Mich 217; 330 NW2d 389 (1982), in measuring damages. In Stockdale the Supreme Court applied contract principles and held that an insurer’s liability is limited to the damages suffered by the insured as a result of the breach and, like any other party who fails to perform its contractual obligations, an insurer who breaches its duty to defend becomes liable for all foreseeable damages flowing from the breach. Id. at 224. However, "[Ojrdinarily an insurer’s liability for breach of its contractual duty to defend its insured is limited to an amount equal to the insured’s assets not exempt from legal process.” Id. at 228.

In his counterclaim Charles Keeley sought damages (based on the bad-faith conduct of Frankenmuth in failing to settle), to the extent of the judgment entered against him, despite the fact that in his answer to interrogatories Charles Keeley admitted that his total assets were less than $5,000. On appeal he argues that Stockdale was a duty to defend case and therefore does not apply *570to a bad-faith failure to settle claim. Furthermore, it is appellants’ contention that Stockdale was a contract action rather than a tort action based on bad faith, the present situation, making application of Stockdale’s damage limitation inappropriate.

Appellants cite Sederholm v Michigan Mutual Ins Co, 142 Mich App 372; 370 NW2d 357 (1985), lv den 424 Mich 857 (1985), and concede that it presents an analogous situation, but contend that Sederholm did not give sufficient weight to the fact that Stockdale involved a breach of contract case rather than a tort action based upon the bad-faith conduct of the insurer. We decline to accept appellants’ argument.

Sederholm, which involved a situation similar to that presented here, extended the Stockdale measure of damages to situations where, like here, the insurer acted in bad faith in failing to settle. Relying on footnote 15 in Stockdale the Sederholm Court stated:

"Based upon the clear language of footnote 15, it is apparent to us that the majority approved and accepted Professor Keeton’s recommendation of damages in actions for breach of duty to settle, and the only question remaining was whether the rule should be extended to 'failure to defend’ situations. Accordingly, we hold that the trial court erred in refusing to apply the Stockdale measure of damages to count ii of plaintiffs’ complaint.” Sederholm, supra at 398.

In Stockdale, where the measure of damages for an insurer’s breach of its duty to defend was limited to the insured’s assets not exempt from legal process, the Supreme Court relied on the following rationale:

"Professor Keeton has suggested that this is an appropriate measure of damages for an insurer’s breach of its duty to settle. Keeton [Insurance Law, § 7.8(b), p 510], § 7.8(f), p 516. As Professor Keeton points out, this approach has the advantage to both parties of eliminating the need for the insured (and consequently, the plaintiff) to suffer *571the costs of a bankruptcy proceeding in order to establish the actual amount of loss.” [Stockdale, supra at 228, n 15.]

The Sederholm Court reasoned that if the Supreme Court can extrapolate from Professor Keeton’s treatise a limitation on the measure of damages in a breach of a duty to defend case to those assets of the assignor not exempt from legal process, then the stated proposition in Professor Keeton’s treatise, that the measure of damages in a breach of a duty to settle is limited to the assets of the assignor not exempt from legal process, is also appropriate. We agree.

However, like Stockdale, Sederholm and Maynard v Sauseda (On Remand), 130 Mich App 445; 343 NW2d 590 (1983), this case should be remanded for a determination of the extent of the assets of Charles Keeley not exempt from legal process, with the trial court entering judgment against Frankenmuth in an amount equal to Charles Keeley’s assets not exempt from legal process.

Appellants also argue that the trial court erred in computing post and prejudgment interest. Appellants argue that Frankenmuth should have been required to pay interest on the entire tort action judgment from the time of the complaint until the policy limits were tendered and that since Frankenmuth failed to do this, it should be liable for postjudgment interest until the deficiency is satisfied. This claim is without merit. This Court has repeatedly rejected attempts to hold an insurer liable for prejudgment interest on judgment amounts which exceed the liability policy limit. See Bent v Bostwick, 148 Mich App 184; 384 NW2d 124 (1986); Matich v Modern Research Corp, 146 Mich App 813; 381 NW2d 834 (1985), lv gtd 425 Mich 871 (1986); Sederholm, supra; Celina Mutual Ins Co v Citizens Ins Co of America, 133 Mich App 655; 349 NW2d 547 (1984).

Appellants also argue that the trial court erred in ruling that damages for emotional and mental strain were not recoverable. Appellants contend *572that Frankenmuth’s bad-faith failure to settle will support a claim for damages based on emotional and mental strain.

Appellants’ claim is without merit. "[A]n allegation of bad-faith breach of an insurance contract does not support recovery of damages for mental distress in Michigan. There must be a finding of tortious conduct independent of the contractual breach to justify the award of mental distress damages.” Crossley v Allstate Ins Co, 155 Mich App 694, 698; 400 NW2d 625 (1986).

Error is also claimed in the award of attorney fees to Wilma Keeley. Wilma Keeley originally requested $13,344.92 in attorney fees. The trial court ultimately awarded $4,152 holding that the expenses incurred by Keeley in the declaratory action were not chargeable to the insurance company. Since the rule in Michigan is that it is improper to award attorney fees for a declaratory action to enforce insurance coverage, the trial court did not err in limiting its award here. Schiebout v Citizens Ins Co, 140 Mich App 804, 814; 366 NW2d 45 (1985), aff’d 427 Mich 602 [398 NW2d 411] (1986); Shepard Marine v Maryland Casualty Co, 73 Mich App 62, 66; 250 NW2d 541 (1976); City Poultry & Egg Co v Hawkeye Casualty Co, 297 Mich 509; 298 NW 114 (1941).

The decision of the trial court is affirmed in part and the matter is remanded for proceedings consistent herewith.