TJO. 33-79 

IN TIIE SUPREP'IE COURT OF THE STATE OF MONTANA 

1983 

LINDSAY DRILLING & CONTRACTING, 

a Mont. corp., WESLEY LINDSAY 

and TERRY LINDSAY, 

Plaintiffs and Appellants, 

UNITED STATES FIDELITY & GUARANTY 

CO., 

Defendant and Respondent. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Lewis & Clark, 

The Honorable Gordon R. Bennett, Judge presiding. 

COUNSEL OF RECORD: 

For Appellants: 

Keller, Reynolds, Drake, Sternhagen & Johnson; 

P. Keith Keller argued, Helena, Kontana 

For Respondent: 

Gough, Shanahan, Johnson & Waterman; Alan L. 

Joscelyn argued, Helena, nlontana 

- 

Submitted: December 8, 1983 

Decided: January 31, 1984 

Filed: bid ' q$+ 

., .- -- Clerk 
Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of 

the Court. 

The District Court of the First Judicial District, Lewis 

and Clark County, issued a declaratory judgment holding that 

United States Fidelity and Guaranty Company (USF&G) has no 

obligation to defend Lindsay Drilling and Contracting 

(Lindsay) in a counterclaim action filed against Lindsay by 

the Seiler Partnership and Jeannie S. Mine Company. Lindsay 

appeals. We reverse the judgment of the District Court. 

The Seiler Partnership and Jeannie S. Mine Company 

retained Linsday in 1979 and 1980 to drill test holes on 

placer claims near Boulder, Montana. The economic 

feasibility of mining in that area was then determined by 

hand washing a core sample from each test hole to determine 

the amount of gold present, compared to other soil 

components. 

The claim owners failed to pay Lindsay for its drilling 

services, causing Lindsay to foreclose on a mechanic's lien. 

The partnership and mine company thereafter filed a 

counterclaim against Lindsay on June 29, 1981, alleging that: 

"[Lindsay's] employees, agents or bv-standers whom 

[Lindsay] allowed to be present during core 

drilling and testing, fraudulently and deliberately 

introduced small quantities of gold into the core 

samples, or otherwise by means unknown . . . altered the test results so as to make it appear 

that the mining properties contained more minerals 

than in fact existed . . . As a direct and 

proximate result, Defendants Seiler and Jeannie 

suffered economic losses exceeding two million 

dollars. 

"3. That the economic losses suffered by Defendant 

Jeannie were a direct result of misrepresentations 

made by [Lindsay] , and [Lindsay' s] negligence in 

allowing one or more individuals to interfere with 

core drilling and testing which resulted in the 

alteration of the test results and data, to the 

economic detriment of Seiler and Jeannie." 

USF&G insured Lindsay Drilling & Contracting and its 

full-time employees. Therefore, Lindsay tendered defense of 

the counterclaim to USF&G, which refused to accept on the 
ground that the allegations of the counterclaim were not 

covered by its insurance policy. 

On October 21, 1981, Lindsay filed a complaint, pursuant 

to the Uniform Declaratory Judgment Act, sections 27-8-101, 

et seq., MCA, to determine the rights, duties and liabilities 

of the parties under the insurance contract. The 

declaratory judgment concluding that "the damages alleged in 

the counterclaim do not fall within those risks contemplated 

and insured by [USF&Gfs] policy," was then issued January 25, 

1983. We view the District Court's interpretation of the 

insurance policy as too restrictive. 

The factual circumstances present essentially two 

issues: (1) whether the insurance policy obligates USF&G to 

defend Lindsay, the insured, in the counterclaim action; and 

(2) whether the policy issued by USF&G provides coverage for 

a resulting judgment in the counterclaim action against 

Lindsay. 

The second issue depends upon whether operations were 

being performed by or on behalf of the insured at the time of 

the injury as is hereafter discussed. This must await 

determination by the jury. Therefore, we confine our holding 

to the question of "obligation to defend." 

A duty to defend exists if the counterclaim sets forth 

facts which represent a risk covered by the terms of the 

insurance policy. Atcheson v. Safeco Insurance Co. (1974), 

165 Mont. 239, 245-46, 527 P.2d 549, 552. The contract's 

major coverage provision and its pertinent definitions state: 

"The Company will pay on behalf of the Insured all 

sums which the Insured shall become legally 

obligated to pay as damages because of 

A. bodily injury or 

B. property damage 

to which this insurance applies, caused by an 

occurrence, and the Company shall have the right 
and duty to defend any suit against the Insured 

seeking damages on account of such bodily injury or 

property damage . . .. 

"'occurrence' means an accident, including 

continuous or repeated exposure to conditions, 

which results in bodily injury or property damage 

neither expected nor intended from the standpoint 

of the Insured. 

"'property damage' means: 

"(1) physical injury to or destruction of tangible 

property which occurs during the policy period, 

including the loss of use thereof at any time 

resulting therefrom, or 

"(2) loss of use of tangible property which has 

not been physically injured or destroyed provided 

such loss of use is caused by an occurrence during 

the policy period." (emphasis supplied) 

The counterclaim alleges that Lindsay, either 

intentionally or negligently, permitted someone to tamper 

with the core samples, "or otherwise by means unknown . . ." 

altered the test results, and that the claim owners 

thereafter incurred losses in their investments as a result 

of relying on the altered core samples. The policy covers 

this set of alleged facts. 

A covered occurrence, as defined in the policy, is one 

whose consequences were neither expected nor intended by the 

insured. In Northwestern National Casualty Co. v. Phalen 

(1979), 182 Mont. 448, 597 P.2d 720, we held that an 

insurance policy with the same definition of "occurrence" 

covered an intentional act whose consequences were neither 

expected nor intended. Here, the counterclaim alleges in 

part that Lindsay negligently allowed bystanders to tamper 

with the core samples. This scenario does not include 

intended or expected consequences. Therefore the 

counterclaim sets forth a covered "occurrence" as defined in 

the policy, if bodily injury or property damage resulted. 
The policy requires physical injury to tangible 

property. Whether property is tangible or intangible 

depends upon its nature and characteristics. State Board of 

Equalization v. Fall (1948), 121 Mont. 280, 192 P.2d 532. 

The core samples are tangible property because they are 

perceptible and material. H.D. & J.K. Crosswell, Inc. v. 

Jones (D.C.S.C.) (1931), 52 F.2d 880, 883. 

The District Court felt that the only loss was data or 

information and as such was intangible. However, there was 

the direct loss of the core sample itself which certainly had 

some value. The drilling expense and other inherent 

production costs establish an intrinsic value in the tangible 

core sample. Thus there was tangible loss. 

The term injury does not necessarily contemplate harm. 

Restatement of Torts 2d $7, Comment a. Rather, it can be a 

physical change or alteration which is either beneficial, 

detrimental or of no consequence. Restatement of Torts 2d, 

$7, Comment b. 

The facts set forth in the counterclaim allege that the 

core samples have been physically injured. They were 

physically and materially altered when they were salted with 

gold. That alteration resulted in a detriment to the 

partnership and mining company. The facts set forth in the 

counterclaim allege "property damage" as defined in the 

insurance policy and the occurrence is covered by the policy. 

USF&G asserts that two of the policy's exclusions apply 

and relieve the company from its defense obligation. We 

disagree. The first exclusion states: 

"This insurance does not apply: 

* * * 

"(n) to property damage to the Named Insured's 

products arising out of such products or any part 

of such products;" 
The alleged damage to the core samples was clearly not caused 

by the core samples themselves. Rather, the counterclaim 

alleges that the damage was caused by either intentional or 

negligent acts of Lindsay. Such acts are not covered by 

exclusion (n) . 

The second claimed exclusion is a broad form property 

damage coverage provision which replaces the typical care, 

custody and control coverage found in insurance policies. It 

states in relevant part: 

"This insurance does not apply: 

" (w) to property damage . . . 

"(2) (d) to that particular part of any property, 

not on premises owned by or rented to the Insured, 

"(i) upon which operations are being performed by 

or on behalf of the Insured at the time of the 

property damage arising out of such operations, or I1 . . . 

We interpret this language to exclude from coverage, 

damage caused by Lindsay or employees during operations. 

However, if the samples were salted by third parties who had 

access to samples only because of Lindsay's negligence, then 

the exclusion would not apply. Since the counterclaim has 

alternative allegations there is still an obligation to 

defend though there may not be coverage if the jury finds 

Lindsay or Lindsay's employees contaminated the samples 

during operations. 

Finally, we find USF&G liable to Lindsay for its 

attorneys fees and expenses incurred in the instant case. It 

was USF&G1s wrongful refusal to defend Lindsay which led to 

this action. Therefore, the insurer is liable for reasonable 

attorney fees, expenses and court costs occasioned thereby. 

Home Insurance Co. v. Pinski Brothers (1972) , 160 Mont. 219, 

500 P.2d 945. 
We vacate the declaratory judgment issued against 

Lindsay and remand this case to the District Court of the 

First Judicial District for entry of a declaratory judgment 

ordering USF&G to defend Lindsay in the suit brought against 

it by the Seiler Partnership and Jeannie S. Mine Company. 

The District Court shall also determine the reasonable 

attorney fees, expenses and court costs of Lindsay in 

bringing this action and order USF&G to pay the same. 

We concur: 

DAA~~.&&LCLP~ 

Chief Justice 

Justices 

Mr. Justices John C. Sheehy, L. C. Gulbrandson and Fred J. Weber 

dissent and will file written dissents later.