No. 88-200
INTHE SUPREME COURT OF THE STATE OFMONTANA

DANIEL S. BURNS,
PlaintiffandAppellant,-vsUNDERWRITERS ADJUSTING COMPANY, an Illinoiscorporation, and CONTINENTAL INSURANCE COMPANY, 

### a New Hampshirecorporation,
Defendantsand Respondents.

APPEAL FROM: DistrictCourtof theThirteenthJudicialDistrict, Inand fortheCountyof Yellowstone, TheHonorableRobertHolmstrom, Judge presiding.
COUNSEL OFRECORD:
For Appellant:
CalvinJ. Stacey; Keefer, Roybal, Hanson & Stacey, Billings, Montana
For Respondent:

Filed:03 i- 

## tg HerbertI. Pierce, 111; Crowley, Haughey, Hanson, Toole & Dietrich, Billings, Montana

L..

Submittedon Briefs: Aug. 4, 1988 Decided: November 17, 1988

### Mr. Justice R. 

### C. McDonough delivered the Opinion of the Court.

Appellant Burns appeals from the order of the District Court of the Thirteenth Judicial District granting summary judgment to respondents Underwriters Adjusting Company and Continental Insurance Company (Underwritersand Continental). We affirm. The issue iswhether Underwritersand Continentalmay be 

### sued for counts based on their failure to defend their insured, Troy Zeiler. Burns sued Zeiler alleging that ~eiler negligently struck Burns. Underwriters and Continental refused to defend the suit because their investigation revealed that the policy excluded coverage for the injury inflicted onBurnsby Zeiler. The facts revealed to Underwriters and Contintental prior to the suit against Zeilerwere recorded by the loh7er court as follows:

That on or about June 24, 1985, the Defendants received notice of theBurns claimand undertook an investigation, including obtaining a recorded statement from the insured, Troy Zeiler, which led the adjuster to believe that the actions of Troy Zeiler were not in self-defense but were intentional; on December 4, 1985, Underwriters Adjusting Company sent a Reservation of Rights letter to Zeiler advising him that serious questions existed as to the coverage; on January 13, 

### 1986, Underwriters Adjusting Company learned that the insured, Troy Zeiler, pled guilty to felony aggravated assault criminal charge, arising out of the same incident; that his sentence was deferred for six years conditioned upon his paying $5,554.00 for the victim's medical expenses; on February 4 and February 11, 

### additionalReservation ofRights letterswere sentto the insured advising that there was no 

### coverage for the acts of 

### the insured; 

# ...Facts in the record also reveal that prior to the filing of the cause at issue here, Underwriters and Consolidated informed Burns's attorney that no coverage existed. Burns filed the claim for Zeiler's "negligence"onMarch 12, 1986. Zeiler did not defend the suit, and the District Court entered judgment for Burns. Zeiler then assigned his claims against Underwritersand Continentalto Burns,and Burns,now assuming Zieler's rights as an insured, initiated the law suit at issue. The policy covering Zeiler excluded from coverage: bodily injury or property damage that _isexpected or intended by a Covered Person except for bodily injury or property damage that results from the reasonable use of force to protect people or property.
The facts showed that Zeiler intentionally struck Burns, and that Zeiler couldnot claim self defense. The District Court concluded that Underwriters and Consolidated had no duty to defend or indemnify Zeiler. To support its decision, the lower court cited Mutual Service Casualty Ins. Co. v. McGehee (Mont. 1985), 711 P.2d 826, 42 St.Rep. 2038 (no duty to indemnify under similar facts and almost identicalpolicy language), and United States Fidelity & GuarantyCo. v. Rae (Mont. 1984), 688P.2d 1246, 41 St.Rep. 1857 (if insurer has no duty to indemnify the insured,there isno duty todefend). We agreewith theDistrict Court that no material facts exist as to the duty to indemnify. The undisputed facts undeniably show that Zeiler intentionally struck Burns without justification. We also agree with the lower court thatMcGehee controlsandmandates the conclusion that therewas no duty to defend. Burns argues, however, that the lower court should have applied Northwestern National Casualty Company v. Phalen

### (1979), 182 Mont. 448, 597 P.2d 720, and similar cases holding that where the pleadings allege a cause which fits within policy coverage, a duty to defend arises. In particular, Burns argues that because his complaint alleges negligence, and because the policy covers negligence, Underwriters and Continental had a duty to defend. We disagree. We hold here that Phalen does not cover every factual situationarising froman insurance company's alleged failure to defend. As argued by respondents, the proper focus of inquiry is the actsgiving rise to coverage,not the language of the complaint. See 14 G. 

### Couch, Couch on Insurance 2d S 

### 51:50 (rev. ed. 1982). The cases relied on by Burns are distinguishable from the present case in that the facts supporting the allegations in the pleadings arguably gave rise to coverage. See,e.g., Phalen, 597 P.2d at 726. The factsestablished in this case clearly showed that thepolicy excluded coverage for the injury suffered by Burns. Thus, Rae controls over Phalen because Burns has been unable to 

### - come forwardwith factsdemonstrating that coverage arguably existed. Rae, 688P.2d at 1251. 

### - In regard to Burns's argument that the duty to defend

was established prior to the initiation of this action,this Court takes the opportunity to make the following observation. Rule 11, M.R.Civ.P., requires that pleadings meet the following requirements: they must be formed after reasonable inquiry;theymust be warrantedby existing lawor
a good faith argument for an extension, modification, or reversalof existing law;and theymust notbe interposed for any improperpurpose. The rule that insurersmay be required to defend suits based on allegations in pleadings must be read with the requirements of Rule 11. As stated by the Supreme Court ofMinnesota in a 

### similar duty to defend suit:To hold otherwise is to invite undercover deals, lack of candor, and manipulation of the tort pleadings as a device for involving an insurerwho could not otherwisebe involved.

F. & M. State Bank v. St. Paul Fire & Marine (Minn. 19761, 242 N.W.2d 840, 844n. 7. We refuse to find the creation of the duty on the basis of the pleadings made in this case. Affirmed

# .

We Concur: Justice

-

JusticesMr. JusticeJohn C. Sheehy,dissenting:

In a properly pleaded case, a trial court could have concluded that under the facts, the injuries inflicted by Zeiler against Burns were intentional and that therefore the policy of insurance under which Zeiler was covered did not. apply, because it did not cover intentional acts. The difficulty with that concept in this case is that the insurer,when Zeilerwas suedby Rurns,unilaterally decided that itdid nothave todefend Zeiler. The insurance company made that decision in the face of the fact that the action against Zeiler alleged that Zeiler had negligently inflicted injuries upon Rurns. Zeilermade demand upon the insurer to defend him in the action brought by Burns, and the insurer refused to tender a defense. The resultwas that a default judgment was entered against Zeiler on grounds that he had negligently inflicted personal injuries upon Rurns. Negligent injuries caused by Zeiler are covered under the policy. The duty of an insurance company to defend its insured is determined by the allegations of the complaint and. the language of the insurance policy. We said in Atcheson v. Safeco Insurance Co. (1974), 165 Mont. 239, 527 P.26 549,

It is to the allegations of the Alaskan complaint thatwe look todeterminewhether or not there isa duty todefend. The appellant has aduty todefend where the complaint sets forth facts which are a part of the covered risk. The rule on the duty to defend is set forth in 50A.L.R..2d 506-7:
"Where a complaint alleges factswhich representa risk outside the coverage of the policy but also avers facts which, if proved, represent a risk covered, the insurer is under a duty to defend

11 

# ...InMcAlear v. St. Paul Ins. Cos. (1972),158Mont. 452, 493 P.2d 331, we held again that the allegations 

### -- of the complaint determined whether the insurer is required to defend the action brought against the insured. InMcAlear, however, the policy excluded from coverage injury to or destruction of tangible property, and the complaint in McAlear's case alleged injury to personal property which was outside the coverage. Because the allegations of the complaint were not sufficient to bring the complaint within the insurance coverage, we agreed that the insurer had no duty todefend. That case,however, should notbe stretched,

nor those following it, to indicate that an insurermay make a unilateral decision not to defend when the allegations of the complaint against the insured, taken as a whole, are fullywithin the coverageprovided by the insurer. When a complaint filed against a putative insured contains allegationswhich, if sustained,would be within the coverage,even though the company may have extrinsic evidence that such is not the case, it does not have the right to refuse to defend the putative insured at that point. Its duty is to act as set forth in Aetna Casualty and Surety Company v. Coronet Insurance Company (Ill.App. 19761, 358



# .. .As shown by these cases, in Illinois, the insurer is obligated to defend an action brought against a putative insured where the complaint in that action sets forth a situation which would potentially be covered by the policy. Unless the complaint alleges facts which, if true, would exclude coverage, the potentiality of coverage is present and the insurer has a duty to defend. Underlying this rule is theprinciple that theduty todefend isbroader thanthe duty topay. If in a case there is a potential coverage but the insurer believes that the insurer has avalid exclusionary coverage defense then the insurer must:

(1) secure a declaratory judgment 

### of its rightswhile defending the potential insured under a reservat.ionof rights,or (2) defend the potential insured under a reservation of rights and adjudicate its coverage in a supplemental suit.

(Citing authority.) In such a case, where the insurer fails to take either course of action, its failure to defend is unjustified and in a subsequent action by the insured against the

- insurer, it will estopped from raising exclusionar~ defenses. (Emphasis added.)
Our prior case of Mutual Service Cas. Ins. Co. 

### v. McGehee (Mont. 1985), 711 P.2d 826, 42 St.Rep. 2038, is not. applicable in this case. Mutual Service Casualty had at least taken the proper steps of seeking a declaratory judgment as to its duty to defend. Here, Underwriters Adjusting Company and Continental Insurance Company took nc such steps. The result is that this Court is in the anomalousposition ofholding that the insurerhad noduty to defend, when a default judgmenthas been entered against its putative insured,based onnegligence. In U.S. Fidelity and Guaranty Co. v. Rae Volunteer Fire Company (Mont. 1984), 688 P.2d 1246, 41 St.Rep. 1857, the insurer also properly proceeded by seeking a declaratory judgment as to its obligations under the liability insurance policy ithad issued. In like manner, in Reliance Ins. Co. v. Fisher and Poeppel (1974)

### , 164 Mont. 278, 521 P.2d 193, the insurer brought a declaratory judgmentaction, where itwasheld that if the insurer would have no obligation to indemnify the insured then it had no contractual obligation to afford a defense. Thepoint of these cases is that an insurer,if ithas a valid exclusionary defense based on its policy provisions, but the allegations of the complaint against its putative insured include potentiai liability

### , the insurer, toprotectitself, must proceed to seek a declaratory judgment or otherwisebegin a supplemental suittodetermine the issue of coverage before judgment is entered against its putative insured,and toproceed under reservation of rights. Our holding in Northwestern National Casualty Co. 

### v. Phalen (1979), 182 Mont. 448, 597 P.2d 720, is entirely outside the issues involved in this case. In Phalen, the insurer properly brought a declaratory judgment to determine whether it owed the defendant coverage under its policy of insurance. The holding in Phalen was that there was a substantial issue as to the intention of the insured at the time of the incident involved,and until thatwas determined

as a matter of fact, the insurer had a duty to not only defend the action,but to cover the liability if the trier of the fact brought the incident within the policy coverage. That is not the situation facing us in this case. Here the insurer did nothing, although demand was made upon it to defend its insured in an action where the complaint stated facts potentially within coverage. The decision of the majority in this case takesMontana out of themainstream of American decisions on this point, that where the complaint alleges facts potentially within the coverage, the duty of the insured is to defend, and that if it feels its policy does not apply, it must bring a separate or supplemental action to determine the issueof coverage. As to the veiled threat of imposing sanctions under Rule 11 against the plaintiff's attorney in this case, that is unnecessary and entirely uncalled for. The plaintiff's attorney was entitled to rely on the commonly accepted rule of law that the failure of the liability insurer to defend a suit against his insured would estop it from asserting any defense as to payment based on noncoverage. It was said inSims v. Illinois National Casualty Co. (111.App. 1963), 193

"An insurer's duty to defend an action against the insured ismeasured, in the first instance,by the allegations in the plaintiff's pleadings, and if such pleadings state facts bringing the injury within the coverageof thepolicy, the insurermust defend, irrespective of the insured's ultimate liability to theplaintiff." Thus, according to the foregoing, the generally recognized doctrine is that the insurer is under a duty to defend the suit against an insured where the petition or complaint in such suit alleges a state of facts within the coverage of the policy. And while there is some conflictof authority, the majority of decisions of the courts which have passed on the question adhere to the general rule even though the insurer's investigation disclosesa conflict between the allegations of the complaint and the actual facts as known to or ascertainable by the insurer. Again, onpage 129:
Thus, while the statement of the general rule in Am.Jur.2nd Automobile Insurance Sec. 167, supra, and the language of the court in the Rom case may at first blush appear to be confusing, what is really meant is that the insurer has no right to insist that the insured be bound by the provisions of the insurance contract inuring to its benefit, i.e., the "Exclusions" provisions, when it has already breached the contract by violating the provision inuring to the benefit of the insured, i.e., the defense provisions. In this sense, it may properly be said tobe estopped.
Under the complaint against Zeiler, the insurer had a clear duty to defend Zeiler in the case. If it had an exclusionary defense, it had a further clear duty to proceed either under a reservationof rights or to seek a declaratory judgment or a supplemental decision that no insurance coveragewas involved. This, Underwriters failed completelyto do. It made the decision, instead of a court, as to whether its policy applied. In that situation, it is collaterallyestopped. The reference of the majority to Rule 11, and its application in cases where the insurerhas a duty to defend, is particularly inappropriate. The proper place, in fact the only place, for a determination of a Rule 11 sanction is in the original action where it is contended that the attorney violated Rule 11. In this case, the proper place for application of Rule 11 was in the original action, t.he action in which the insurer deigned not to appear. Moreover, the remedy for a violationunderwhich Rule 11 is applicable is an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleading, including a reasonable attorney fee. Takinq away a party's cause of action is not a remedy contemplated by Rule 11. The resort of the majority to Rule 11 in this

case so as to justify a result contrary to all the decided cases shows little understanding of how and when Rule 11 is tobe applied. 

# ~-~9.1, Justice

IL, 'I 

### Mr. Justice William E. Hunt, Sr.:

Iconcur in the dissent ofMr. JusticeSheehy.