Title: MCALEAR v ST PAUL INS COS

State: montana

Issuer: Montana Supreme Court

Document:

No. 12113 I N T H E S U P R E M E C O U R T O F T H E STATE O F MONTANA 1972 ALLEN L . McALEAR, P l a i n t i f f and Respondent, SAINT P A U L INSURANCE COMPANIES, a Corporation, Defendant and Appellant. Appeal from: D i s t r i c t Court of the Fourteenth J u d i c i a l D i s t r i c t , Honorable N a t Allen, Judge presiding . Counsel of Record : For Appellant : Patrick F w Hooks argued, Townsend, Montana. Glenn F w Kenney appeared, Helena, Montana. For Respondent: Allen L. McAlear argued, Bozeman, Montana. Submitted: January 12, 1972 Decided: JPN 3 11972 Filed : 1]fi~q 3 7 * . 1972 Mr. Justice Frank I. Haswell delivered the Opinion of the Court. In a declaratory judgment action involving an attorney's professional liability insurance policy, the district court held the insurer liable for the cost of its insured's defense against a third-party property damage action based upon a colli- sion caused by the insured's runaway airplane. From this final judgment, the insurer appeals. The single controlling issue upon appeal is whether the insurer is liable for the costs of such defense incurred by its insured. The district court held the insurer liable. We reverse. The facts in this case are uncontradicted as the case was submitted on the basis of an agreed statement of fact which included the pleadings, stipulated exhibits, and discovery pro- ceedings. On November 14, 1969, plaintiff Allen F. McAlear, a Bozeman attorney, purchased a professional liability policy from defendant, Saint Paul Insurance Companies, containing the follow- ing insuring agreement and exclusions: "Insuring Agreements "Coverage A - Professional Liability "To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages arising out of the performance of professional services for others in the In- sured's capacity as a lawyer and caused by the Insured or any other person for whose acts the Insured is legally liable (the performance of professional services shall be deemed to in- clude the Insured's acts as an administrator, conservator, executor, guardian, trustee or in any similar fiduciary capacity, but only to the extent for which in the usual attorney- client relationship the Insured would be legally responsible as attorney for a fiduciary) and t h e Company s h a l l have t h e r i g h t and duty t o defend i n h i s name and behalf any s u i t a g a i n s t t h e Insured a l l e g i n g damages, even i f such s u i t is groundless, f a l s e o r fraudulent; b u t t h e Company s h a l l have t h e r i g h t to make such i n v e s t i g a t i o n and negotiation of any claim o r s u i t a s may be deemed expedient by t h e Com- pany. The Company, however, s h a l l not make settlement or compromise any claim or s u i t without t h e w r i t t e n consent of t h e Insured." The "Exclusions" s e c t i o n of t h e policy s p e c i f i c a l l y provides : "Coverage A does not apply: " ( 3 ) t o bodily i n j u r y t o , or sickness, d i s e a s e or death of any person, o r t o i n j u r y to o r d e s t r u c t i o n of any tangible property, includ- ing t h e l o s s of use thereof." During t h e policy period McAlear flew t o S a l t Lake City with a c l i e n t , Robert S. Beck. Beck had contacted McAlear re- garding t h e purchase of a t r a i l e r and it was necessary f o r them t o go t o S a l t Lake C i t y t o obtain financing from a p r i v a t e indi- vidual. A s t h e sellers w e r e insolvent it w a s necessary t o com- p l e t e t h e t r a n s a c t i o n and get t h e t i t l e recorded before l i e n s could be recorded a g a i n s t t h e s e l l e r ' s equity i n t h e trailer. Beck and McAlear had flown to S a l t Lake C i t y on March 20, 1969, i n McAlear's plane f o r t h i s purpose. They transacted t h e i r business on March 2 1 and 22. A t about 6:00 a.m. on March 23, while preparing t o r e t u r n t o Bozeman, McALear was engaged i n a p r e f l i g h t inspection of h i s plane. H e manually turned over t h e propellor while t h e i g n i t i o n was i n t h e "on" position. This caused t h e p i l o t l e s s a i r p l a n e t o a c c e l e r a t e down t h e ramp and crash i n t o t h r e e o t h e r airplanes. On May 21, 1970, an action was filed in the United States District Court in Utah by Gordon S . Burchett, the owner of one of the damaged planes. The Burchett action sought damages a- gainst McAlear for his alleged negligence and sought recovery of repair costs, depreciation and loss of use of Burchett's air- plane. McAlear's professional liability policy with his insurer, Saint Paul Insurance Companies, is the sole basis for his claim in the instant declaratory judgment action. He demanded of Saint Paul that it defend him in the Burchett action. Saint Paul denied this demand on the basis that his policy afforded no cover- age and accordingly it owed him no duty to defend. McAlear then hired his own attorney to defend in the Burchett action. Thereafter McAlear brought the instant declaratory judg- ment action against Saint Paul seeking a judgment holding it* liable for the reasonable costs of his defense. The case was filed in the district court of Meagher County and submitted to the district court, sitting without a jury, for decision on the basis of an agreed statement of facts. The district court on July 2, 1971 entered an "Order", in effect the judgment, provid- in material part: "IT IS HEREBY ORDERED, ADJUDGED AND DECREED, that the Plaintiff recover for his cost of defense in the suit brought against him. "It appears to the Court that the policy was carelessly written, and since this is the fault of the insurance company, they should pay for their own carelessness, because cer- tainly the duty to defend is not limited to the liability of the policy." Following d e n i a l of i n s u r e r ' s motion t h a t t h e c o u r t e n t e r w r i t t e n findings of f a c t and conclusions s f l a w , t h e i n s u r e r appeals, The t h r u s t of i n s u r e r ' s p o s i t i o n i n t h e i n s t a n t case is t h a t its duty t o defend is limited to claims a g a i n s t t h e insured within t h e coverage of t h e policy. The i n s u r e r con- tends t h a t where, a s here, t h e r e is no primary indemnity cover- age f o r t h e Burchett accident, it has no duty to defend. Insurer points o u t t h a t t h e b a s i c insuring agreement i n t h e policy (Cover- age A ) , properly construed, s o l i m i t s t h e duty t o defend and t h a t t h e policy contains an express exclusion of property dam- age claims (Exclusion 3 ) . O n t h e o t h e r hand, t h e g i s t of t h e insured's p o s i t i o n is t h a t t h e duty t o defend is contractual and where, as here, t h e duty t o defend is u n r e s t r i c t e d by t h e terms of t h e policy, t h e duty t o defend is not limited t o t h e primary indemnity coverage of t h e policy. According t o t h e insured, t h e duty t o defend i n t h e i n s t a n t case is e n t i r e l y independent of t h e primary in- demnity coverage of t h e policy. Thus, t h e insured argues, where the Burchett complaint f a l l s within t h e scope of t h e "duty t o defend" provision i n t h e policy, t h e i n s u r e r is obligated t o defend without regard t o t h e primary indemnity coverage afford- ed by t h e policy. A s a c o r o l l a r y t o t h i s argument, t h e insured i n s i s t s t h a t the exclusion of property damage claims from t h e primary indemnity coverage afforded by t h e policy i n no way l i m i t s t h e duty of t h e i n s u r e r t o defend. Ordinarily a l i a b i l i t y i n s u r e r has no duty t o defend an action a g a i n s t t h e insured when t h e c l a i m o r complaint does not f a l l within t h e coverage of t h e l i a b i l i t y policy. I f t h e i n s u r e r would have no obligation t o indemnify t h e insured should t h e complainant recover, then t h e r e is no c o n t r a c t u r a l obliga- t i o n t o afford a defense. This general r u l e i s s u c c i n c t l y s t a t e d i n 50 ALR2d a t page 472, a s follows: " * * * a l i a b i l i t y insurance company has no duty t o defend a s u i t brought by a t h i r d p a r t y a g a i n s t t h e insured where t h e p e t i t i o n o r complaint i n such s u i t upon its face a l - leges a s t a t e of f a c t s which f a i l s t o bring t h e case within t h e coverage of t h e policy. Con- sequently t h e company is not required t o de- fend i f it would not be bound t o indemnify t h e insured even though t h e claim a g a i n s t him should p r e v a i l i n t h a t action." To l i k e e f f e c t see 49 ALR2d 703; 1 1 4 U. of Pa. Law Review.734, "The I n s u r e r ' s Duty t o Defend Under a L i a b i l i t y Insurance Policy" pp. 747-749, 757; 7 A Appleman Ins. L. & P., S 4685, pp. 462, 471. The a l l e g a t i o n s i n t h e complaint a g a i n s t t h e insured determine whether t h e r e is coverage under t h e policy. This gen- eral r u l e is well s t a t e d i n 4 4 AmJur 23, Insurance, s 1539; "Upon t h e b a s i s of t h e a l l e g a t i o n s of t h e complaint o r p e t i t i o n , t h e courts have adopted t h e following tests f o r determining whether p a r t i c u l a r a l l e g a t i o n s require t h e i n s u r e r t o defend t h e a c t i o n brought a g a i n s t t h e insured: i f t h e complaint i n t h e a c t i o n brought a g a i n s t t h e insured upon i t s face a l l e g e s f a c t s which come within t h e coverage of t h e l i a b i l i t y policy, t h e i n s u r e r is obligated to assume t h e defense of t h e a c t i o n ; b u t i f t h e alleged f a c t s f a i l t o bring t h e case within t h e policy coverage, t h e i n s u r e r is f r e e of such o b l i g a t i o n , a t least i n i t i a l l y . Stated d i f f e r e n t l y , t h e i n s u r e r is under an obligation t o defend only i f it could be held bound to indemnify t h e insured, assuming t h a t t h e injured person proved t h e a l l e g a t i o n s of t h e complaint, regardless of t h e a c t u a l outcome of t h e case. * * * " Measuring t h e Burchett c l a i m a g a i n s t t h e policy pro- v i s i o n s here, it is clear t h a t Burchett's a c t i o n is a property damage claim seeking money damages f o r M c A l e a r ' s alleged neg- ligence i n damaging Burchett's plane, depreciation i n its value, and l o s s of its use. The policy expressly excludes from cover- age "injury t o o r d e s t r u c t i o n of any t a n g i b l e property, includ- ing t h e l o s s of use thereof". Under such circumstances t h e r e is no duty t o defend, a s has been w e l l expressed by t h e Michigan Supreme Court i n Duval v. Aetna Casualty & Surety Co., 304 Mich. "The i n s u r e r is not required t o defend t h e insured a g a i n s t claims expressly excluded from coverage i n t h e policy, The exception i n t h e policy is a p a r t of t h e c o n t r a c t be- tween t h e p a r t i e s . The duty of t h e insurance company to defend was not independent of t h e duty t o pay damages, i f any, The two provisions a r e not separable." However, McAlear contends t h a t t h e "duty t o defend" pro- v i s i o n of h i s policy is unique, thereby taking h i s case o u t s i d e t h e scope of t h e general r u l e . H e points o u t t h a t t h e b a s i c in- suring agreement, Coverage A, provides i n material p a r t "the company s h a l l have t h e * * * duty t o defend * * * any s u i t a g a i n s t t h e Insured a l l e g i n g damages, even i f such s u i t is groundless, false o r fraudulent", H e f u r t h e r contends t h i s provision con- s t i t u t e s an u n r e s t r i c t e d c o n t r a c t u a l o b l i g a t i o n on t h e p a r t of t h e i n s u r e r to defend without regard t o t h e primary indemnity coverage afforded by t h e policy. M c A l e a r contends t h a t because such language n e i t h e r r e f e r s t o nor restricts t h e duty t o defend t o damage a c t i o n s within t h e coverage of t h e policy, any s u i t f o r damages within the scope of the "duty to defend" provisions of the policy imposes such duty on the insurer. For emphasis, he points out that under coverage B in the policy (not purchased by the insured in the instant case) the duty to defend is re- stricted by the following language: " * * * the Company shall have the right and duty to defend any suit against the Insured seeking damages on account of such bodily in- jury or property damage, even if any of the allegations of the suit are groundless * * *". Regarding interpretation of the terms of the policy here, the insured insists that an insurance policy differs from an ordinary contract between two persons in that there is no true negotiation and bargaining between the insurer and the insured in arriving at the terms of an insurance policy; that the terms of the policy are standardized by the insurer and offered to the insured on a "take-it-or-leave-it" basis; and that the insured really has nothing to say about the policy terms because of his lack of any real bargaining power with the insurer. The insured here reminds us that because of such circumstances existing in non-negotiated "adhesion" contracts such as insurance policies, a11 doubts as to the meaning of the terms in the policy must be resolved in favor of the insured and against the insurer. We recognize this principle of interpretation of "adhesion" contracts as expressed by the California Supreme Court in Gray v, Zurich Insurance Company, 65 C.2d 263, 419 P.2d 168, 171: "Although courts have long followed the basic precept that they would look to the words of the contract to find the meaning which the p a r t i e s expected from them, they have a l s o applied t h e doctrine of t h e adhesion c o n t r a c t t o knsurance p o l i c i e s , holding t h a t i n view of t h e d i s p a r a t e bargaining s t a t u s of t h e p a r t i e s we must a s c e r t a i n t h a t meaning of t h e c o n t r a c t which t h e insured would reason- ably expect. " (EmpHasis added. ) The Montana Supreme Court has previously recognized t h i s same test i n t h e following language from S t . Paul F i r e & Marine Ins. Co. v. Thompson, 150 Mont. 182, 187, 433 P.2d 795: "Again looking t o t h e Kansas r u l e which w e have adopted, w e f i n d t h a t , ' t h e test is not what the i n s u r e r intended t h e words of t h e policy t o mean b u t what a reasonable person i n t h e p o s i t i o n of an insured would understand them t o mean. ' " Applying t h i s test t o t h e i n s t a n t case, would a reason- a b l e lawyer expect t h a t h i s professional l i a b i l i t y policy o b l i - gated h i s i n s u r e r t o defend him a g a i n s t damage s u i t s expressly excluded from t h e primary indemnity coverage of t h e policy? O r put another way, would a reasonable lawyer understand t h a t h i s professional l i a b i l i t y policy obligated h i s i n s u r e r t o defend him a g a i n s t a l l damage s u i t s of whatever nature? W e hold t h a t a reasonable lawyer would no more understand t h a t h i s professional malpractice policy obligated h i s i n s u r e r t o defend him a g a i n s t damage claims a r i s i n g o u t of an a i r p l a n e accident than a g a i n s t damages a r i s i n g o u t of an a s s a u l t , an automobile accident, o r a f a l l on t h e s t e p s of h i s residence. Both McAlear and t h e d i s t r i c t c o u r t r e l y heavily upon t h e holding of t h i s Court i n Thompson f o r t h e proposition t h a t t h e duty t o defend is broader than t h e primary indemnity coverage under an insurance policy. There w e s a i d a t p. 188, "'"The principle that 'the duty to defend is broader than the duty to pay' is now beyond cavil." The agreement to defend is not a covenant subordinate to or dependent on the agreement to indemnify; it is distinct from, different from, independent of, and broader than the insurer's promise to pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of the liability imposed upon him by law for damages because of bodily injury. There is no language in the policy making the defense covenant dependent on the amount of liability for bodily injury. The defense covenant is clear, positive and unambiguous, and should be accorded its plain and ordinary meaning.' Comunale v. Traders & Gen. Ins. Co., 321 P.2d 768, 773, (Cal .App.) " Thompson is clearly distinguishable and must be construed in the light of the facts of that case. There the insured carried an automobile liability policy with State Farm Mutual Insurance Company. In prior litigation State Farm had paid the limits of the policy on a judgment against Thompson and argued that it had no further duty to defend Thompson. We held otherwise. The distinction is that in Thompson the claim against the insured was clearly within the primary indemnity coverage of his policy, while here Burchett's claim is clearly outside the primary indemnity coverage. In Thompson the insurer urged that it was relieved of its duty to defend because of payment of the liability limits, whereas in the instant case there can never be any obligation on the part of the insurer to pay any judgment in the Burchett action. Additionally, in Thompson, the duty to defend was contained in one portion of the policy, while the duty to pay was contained in another; here the duty to defend and the duty to pay are all included in one sentence. Thus, Thompson is no authority for the proposition that an insurer's duty to defend extends to cases outside the primary indemnity coverage of the policy. For the foregoing reasons the judgment of the district court is reversed and the cause dismissed. Associate Justice