NO. 93-132

IN THE SUPREME COURT OF THE STATE OF MONTANA

1993

THE CITY OF BOZEMAN,

Plaintiff, Respondent,

and Cross-Appellant,

v.

AIU INSURANCE COMPANY,

Defendant and Appellant.

APPEAL FROM: District Court of the Eighteenth Judicial District,

In and for the County of Gallatin,

The Honorable Thomas A. Olson, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

E. Lee LeVegue and L. D. Nybo, Conklin, Nybo,

LeVegue & Murphy, Great Falls, Montana

For Respondent:

J. Robert Planalp and Steve Reida, Landoe,

Brown, Planalp & Braaksma, Bozeman, Montana

Filed:

Submitted on Briefs: October 21, 1993

Decided: December 14, 1993
Justice Terry N. Trieweiler delivered the opinion of the Court.

Plaintiff City of Bozeman brought this action in the District

Court for the Eighteenth Judicial District in Gallatin County to

recover attorney fees and costs incurred because of AIU Insurance

Company's refusal to represent the City on appeal in Story v. City of

Bozeman (1990), 242 Mont. 436, 791 P.2d 767. The District Court

concluded that AIU breached its duty to defend the City and entered

judgment in favor of the City in the amount of $17,739.53.

However, the City's claim for prejudgment interest and attorney

fees incurred in the present case was denied. AIU appeals from the

District Court's judgment in the City's favor. The City

cross-appeals from the District Court's denial of its claim for

prejudgment interest and attorney fees. We reverse the judgment of

the District Court in favor of the City, and therefore, do not

reach the issues in the City's cross-appeal.

The issues on appeal are:

1 . Did the District Court err when it concluded that AIU had

a contractual obligation to defend the City of Bozeman on appeal in

the case of Storyv.CityofBozeman (1990), 242 Mont. 436, 791 P.2d 767?

2 . Did the District Court err when it concluded as a matter

of law that aside from its insurance contract, AIU specifically

agreed to represent the City of Bozeman on appeal to the Supreme

Court unless its investigation dictated otherwise and that no

investigation was conducted?

2
DISCUSSION

In 1985, AIU issued a comprehensive general liability policy

to the City of Bozeman which was in effect for the period from

June 30, 1985, to June 30, 1986. Pursuant to the terms of that

policy, the company agreed to pay on behalf of its 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, even if any of

the allegations of the suit are groundless, false or

fraudulent, and may make such investigation and

settlement of any claim or suit as it deems expedient,

but the company shall not be obligated to pay any claim

or judgment or to defend any suit after the applicable

limit of the company's liability has been exhausted by

payment of judgments or settlements.

In other words, the policy generally covered the City against

claims for bodily injury or property damage if they resulted from

an occurrence. The following definitions in the policy narrowed

the scope of its coverage:

"Bodily injury" means bodily injury, sickness, or a

disease sustained by any person which occurs during the

policy period, including death at any time resulting

therefrom:

"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

anytime 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;

3
tsOccurrencetr means an accident, including continuous or

repeated exposure to conditions, which results in bodily

injury or property damages neither expected nor intended

from the standpoint of the insured . . . .

Specifically excluded from coverage under the policy was any

liability assumed by the insured under any contract.

In addition ,to the general coverage set forth above, AILl's

policy of insurance with the City included a broad form

comprehensive liability endorsement in which it agreed to indemnify

the insured from any damages it became obligated to pay by

"publication or utterance of a libel or slander or of other

defamatory or disparaging material . . . .I*

In December 1986, the City was sued for damages by Mark Story

based on conduct that allegedly occurred during the policy period.

Story filed an amended complaint in January 1987 in which he

included claims for breach of contract, breach of the implied

covenant of good :faith and fair dealing, constructive fraud, and

defamation. Story sought contract damages, unspecified compensatory

damages, and punitive damages.

The City tendered its defense in the lawsuit to AIU. In

response, on January 12, 1987, AIU agreed to defend the City while

reserving its right to rely on all of the policy's provisions

before determining whether to extend coverage or continue

representation in the future. The City was specifically advised

that "[w]e do not intend to waive any provisions of the policy, and

strictly reserve our rights to later decline coverage and withdraw

Mr. Herndon from the defense of this action."

4
On January 27, 1987, AIU wrote to the City again and pointed

out that pursuant to the endorsement, Story's claim for damages

based on defamation was covered under the policy, but that his

other claims were not covered, based on the policy's definition of

"occurrence" which precluded coverage for intentional conduct.

That letter repeated AIU's "reservation of rights," as did

subsequent letters dated March 23, 1987, and November 12, 1987.

In its letter dated November 12, AIU stated:

If at such time our position would be altered as a result

of our investigation or a determination is made by the

Supreme Court of Montana of such issues, we will

immediately notify you, as the insured, with regard to

our position.

Story's complaint was generally based on his allegations that

he had contracted with the City to construct water main

improvements in August 1985; that subsequent to entering into the

contract the City tried to alter the terms of the contract to

Story's detriment: that the City breached the terms of the

contract: and that its engineer misrepresented Story's performance

to his bonding company, which caused him to lose his bonding. He

alleged that because of the City's breach he was still owed

$230,747.17 under the terms of his contract, and that because of

the City's bad faith, he sustained unspecified general damages.

Story alleged damage to his business, but alleged no property

damage nor personal injury as they were defined in the AIU policy.

Story's claim against the City went to trial, and the jury

returned its verdict on March 23, 1988. The jury found that the

City did breach its obligation of good faith and fair dealing

5
related to its contract with Story, but that its engineer's letter

to Story's bonding company was not defamatory. The issue of fraud

was not submitted to the jury. However, the jury did find that the

City breached its contract.

The jury awarded compensatory damages in the amount of

$360,000 as compensation for the City's breach of the covenant of

good faith and fair dealing. It awarded contractual damages in the

amount of $13,236 based on the City's breach of contract. It was

specifically advised not to award damages for defamation if there

was no finding of defamation.

Judgment was entered for Story on March 24, 1988, and the City

advised AIU that it wanted to appeal from the judgment. However,

AIU declined to further represent the City on appeal.

Neither Story nor the City appealed from that part of the jury

verdict finding that no defamation had occurred.

On appeal, this Court reversed the judgment of the District

Court based upon error in the verdict form and the law of bad faith

which had been applied, and remanded to the District Court for

retrial. On remand, Story again alleged defamation in spite of the

fact that he had not appealed from the jury's previous finding, and

AIU again assumed .the City's defense. Story's claim was ultimately

retried and appealed to this Court for a second time, as a result

of which the jury's second verdict was affirmed. Story v. City of Bozeman

(Mont. 1993), 856 P.2d 202, 50 St. Rep. 761.

On June 25, 1990, the City filed this complaint against AIU in

which it alleged that pursuant to the terms of its contract of

6
insurance, AIU had an obligation to represent it during the first

appeal, and because AIU had breached that obligation, it incurred

$17,499.53 in costs and fees to prosecute the appeal. The City

also alleged that it had been led to believe by AIU that the

company would provide a defense to the conclusion of the litigation

and that the company was, therefore, estopped to terminate its

defense before the litigation had been concluded.

Both parties conceded that the facts were not in dispute and

moved for summary judgment. In support of its motion, the City

primarily relied on the terms of its contract, the correspondence

which was previously discussed, and the history of Story's claim

against the City, which is well documented in our previous

decisions.

On January 7, 1992, the District Court entered its order

granting the City's motion for summary judgment and denying AIU's

motion. As the basis for its decision, the District Court

concluded that since Story was free to reallege defamation after

remand following the City's first appeal, that the City always

risked liability for defamation, and therefore, that its insurer

had a continuing obligation to defend it on appeal. As a second

basis for its decision, the District Court concluded that the

company had specifically agreed to continue its representation of

the City until there was a determination by the Supreme Court, or

until its investigation indicated otherwise. The District Court

concluded that since no investigation had been conducted, AIU's

obligation continued pursuant to its agreement.

7
However, the District Court denied the City's claim for

attorney fees and costs incurred in bringing this action on the

basis that there was no statutory right to fees, nor any

contractual obligation to pay them.

I .

Did the District Court err when it concluded that AIU had a

contractual obligation to defend the City of Bozeman on appeal in

the case of Storyv.CityofBozeman (1990), 242 Mont. 436, 791 P.2d 767?

It is AIU's position that following the first verdict for

Story, and during the appeal from that verdict, there were no

claims being asserted against the City which were covered under its

policy with AIU, and therefore, there was no longer a duty to

defend. Although Story did reassert the defamation claim after

remand following the first appeal to this Court, neither AIU nor

the City considered that a legal possibility, as is illustrated by

the City's argument during the second appeal. Furthermore, AIU

points out that as soon as the claim for defamation was reasserted

against the City, it reassumed responsibility for the defense.

AIU cites Burns v. UnderwritersAdjusting Company (1988) , 234 Mont. 508,

765 P.2d 712, and Da& Ditches Irrigation Di&ct v. National Surety ( 1988) , 234

Mont. 537, 764 P.Z!d 1276, and the Federal District Court's decision

in Aetna Casualy and Surety Company v. First Security Bank of Bozeman ( D. Mont.

i987), 662 F. Supp. 1126, for the principles that under the terms

of this policy there was no coverage for the claims asserted by

a
story, other than his claim for defamation, and that where there is

no coverage, there is no duty to defend.

The City argues that an insurer's obligation to defend a suit

does not end with a successful verdict in the trial court, but

includes represen.tation on any appeal that results from the trial

court's verdict. The City contends that since we held in our

second Story decision that Story could reassert his claim for

defamation after remand from the first appeal, that the defamation

claim had not been finally resolved, and therefore, that AIU had a

continuous duty to represent the City on appeal from the first

verdict.

In support of its argument that AIU had a continuing duty to

represent it on appeal, the City cites our decision in St.PaulFire&

h4aiineIn.suranceCompanyv. Thompson (1967), 150 Mont. 182, 433 P.2d 795,

and numerous decisions from other jurisdictions.

We conclude that the facts in Thompson are not sufficiently on

point to establish precedent for our decision in this case, and

that for similar reasons, the authorities from other jurisdictions

relied on by the City are unpersuasive.

In Thompson, the insured had been sued for conduct which was

definitely covered under the policy. However, his insurer, after

expending the limits of coverage provided for in the policy,

decided that it would no longer represent its insured. We

concluded that under those circumstances, the insurer's duty to

defend is in addition to its duty to indemnify and was not

9
satisfied by the insurer's payment of policy limits. Similarly,

most of the authorities provided by the City from other

jurisdictions relate to an insurer's duty to represent its insured

on appeal where the issues on appeal relate to a claim which is

covered under the policy.

In this case, to determine AlU's obligation on appeal, we must

look to the terms of the policy. However, the policy only created

a duty to defend any suit which sought damages on account of bodily

injury or property damage caused by an occurrence, as defined in

the policy. In L>aly Ditches, we held that where an insured's former

employee sued for breach of the covenant of good faith and fair

dealing and that where the insured's policy provided for coverage

under terms identical to those in this case, the insured's

termination of its employee was not an "occurrence" under the terms

of the policy, and therefore, the claim was not covered. Based on

lack of coverage for the claim, we concluded in that case that the

insurer had no duty to defend its insured. Da& Ditches, 765 P.2d at

1279. Likewise, in Bums, 764 P.2d at 713, we held that where there

is no duty to indemnify the insured there is no duty to defend.

Under similar circumstances, the Federal District Court for

the District of Montana has concluded that, based on Montana

precedent, there is no duty for an insurer to defend its insured.

In First Security Bank of Bozeman , a former employee sued First Security

Bank for wrongful termination of her employment. She sought

damages for lost wages, diminished earning capacity, harm to her

10
reputation, and emotional distress. She also sought punitive

damages. Aetna insured the bank under a comprehensive liability

policy, but filed a declaratory judgment action to establish that

it had no duty to defend on the grounds that the damages and

injuries sought by the employee did not fall within the policy

definitions of "bodily injury," "property damage," or "occurrence."

After reviewing our prior authorities, the district court agreed.

In arriving at its conclusion, the district court stated:

Ordinarily, a liability insurer has no duty to defend an

action against its insured when the claim or complaint

clearly falls outside the scope of the policy's coverage.

[McAlear v. &ZintPUUlI?WrUnCe Company (1972), 158 Mont. 452,

456, 493 P.2d 331, 3341. Where the claim against the

insured sets forth facts representing a risk covered by

the terms of the policy, the insurer's duty to defend

arises. Lindsay Drilling and Contracting v. United States Fidelity and

GuarantyCompany, [ZOS] Mont. [91, 941, 676 P.2d 203, 205

(1984) .

First Security Bankof Bozeman, 662 F. Supp. at 1128.

The district court in that case also concluded that the type

of damages claimed by the employee (similar to those damages

claimed by Story) did not result from bodily injury or property

damage, as defined in the policy.

Likewise, in this case we conclude that AIU's duty to defend

the City depended on a claim being asserted against the City

seeking damages on account of conduct covered by the terms of its

comprehensive general liability policy or the broad form

comprehensive endorsement to that policy. During the first trial,

such a claim existed based on Story's allegation that he was

defamed by the City's engineer. However, when that claim was

11
resolved favorably to the City, and when neither Story nor the City

appealed the jury's determination that he had not been defamed,

there were no issues on appeal relating to claims covered by the

terms of AIU's policy with the City. Therefore, we conclude that

AIU did not have a contractual obligation under the terms of its

insurance policy with the City to represent the City on appeal, and

we reverse the District Court's conclusion that it did.

II.

Did the District Court err when it concluded as a matter of

law that aside from its insurance contract, AIU specifically agreed

to represent the City of Bozeman on appeal to the Supreme Court

unless its investigation dictated otherwise and that no

investigation was conducted?

On November 12, 1987, AIU wrote to the City Attorney for the

City of Bozeman and reaffirmed its reservation of rights. In that

letter it stated:

If at such time our position would be altered as a

result of our investigation or a determination is made by

the Supreme Court of Montana of such issues, we will

immediately notify you, as the insured, with regard to

our position.

Based on that statement, the District Court found that:

Further, AIU, through its representative, Steve

Armstrong, represented to the City of Bozeman, through

its representative Bruce Becker, on November 12, 1987,

that defense of the matter would continue until "such

time our position would be altered as a result of our

investigation or a determination is made by the Supreme

Court of Montana on such issues." No investigation was

conducted by AIU.

12
Based on that finding, the District Court concluded: '*Further,

AIU specifically agreed to proceed through the determination of the

Supreme Court, absent an investigation. No such investigation was

conducted.1'

On appeal, AIU contends there was no evidence before the

District Court from which it could find that no investigation was

conducted by the company before it terminated its representation of

the City. Therefore, AIU contends that the District Court could

not find, as a matter of law, that it had breached its agreement to

defend on that basis.

The City takes the position that since AIU presented no

evidence that it had conducted an investigation, the District Court

was correct to grant the City's motion for summary judgment on that

basis.

The problem with the City's argument is that it ignores the

rules of procedure. When a party moves for summary judgment, it

has the burden of establishing that there is no issue of fact. It

cannot rely on its contentions in its pleadings, or the arguments

of its counsel.

In this case, there was no evidence from which the District

Court could conclude that AIU conducted no investigation prior to

the termination of its representation of the City. Further, reason

compels the opposite conclusion.

Prior to the time that it declined to represent the City on

appeal, the attorney retained and paid by AIU had prepared for

trial, participated in trial, successfully defended against Story's

13
claim for defamation, and received the jury's verdict. Even if we

were to assume (a.nd we have no reason in the record to do so) that

no investigation was conducted by AIU prior to trial, we certainly

must conclude that by the time the trial was completed, AIU and the

attorney that it retained were completely familiar with all of the

factual bases for Story's claim. No further investigation could be

required to comply with the representation made in AIU's November

12, 1987, letter. Therefore, we conclude that the District Court

erred when it held that AIU breached the agreement to investigate

before withdrawing its defense of the City of Bozeman.

We reverse the judgment of the District Court and remand this

to the District Court with instructions to enter judgment in favor

of defendant. Based on this decision, it is not necessary to

consider those issues raised in the City's,cross-appeal.

/

J stke

We concur: