No. 88-200 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

DANIEL S. BURNS, 

Plaintiff and Appellant, 

-vsUNDERWRITERS ADJUSTING COMPANY, 

an Illinois corporation, and 

CONTINENTAL INSURANCE COMPANY, 

a New Hampshire corporation, 

Defendants and Respondents. 

APPEAL FROM: District Court of the Thirteenth Judicial District, 

In and for the County of Yellowstone, 

The Honorable Robert Holmstrom, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Calvin J. Stacey; Keefer, Roybal, Hanson & Stacey, 

Billings, Montana 

For Respondent: 

Filed: 03 

i- tg Herbert I. Pierce, 111; Crowley, Haughey, Hanson, 

Toole & Dietrich, Billings, Montana L.. 

Submitted on 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 (Underwriters and Continental). 

We affirm. 

The issue is whether Underwriters and Continental may 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 on Burns by Zeiler. 

The facts revealed to Underwriters and Contintental 

prior to the suit against Zeiler were recorded by the loh7er 

court as follows: 

That on or about June 24, 1985, the Defendants 

received notice of the Burns claim and 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, additional Reservation 

of Rights letters were sent to 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" on March 12, 1986. 

Zeiler did not defend the suit, and the District Court 

entered judgment for Burns. Zeiler then assigned his claims 

against Underwriters and Continental to 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 _is expected 

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 could not 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 identical policy language), and United States Fidelity 

& Guaranty Co. v. Rae (Mont. 1984), 688 P.2d 1246, 41 St.Rep. 

1857 (if insurer has no duty to indemnify the insured, there 

is no duty to defend). We agree with the District 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 that McGehee controls and mandates the conclusion 

that there was 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 

situation arising from an insurance company's alleged failure 

to defend. As argued by respondents, the proper focus of 

inquiry is the acts giving 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 

facts established in this case clearly showed that the policy 

excluded coverage for the injury suffered by Burns. Thus, 

- Rae controls over Phalen because Burns has been unable to 

come forward with facts demonstrating that coverage arguably 

existed. - Rae, 688 P.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; they must be warranted by existing law or 

a good faith argument for an extension, modification, or 

reversal of existing law; and they must not be interposed for 

any improper purpose. The rule that insurers may 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 of Minnesota 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 insurer who 

could not otherwise be involved. 

F. & M. State Bank v. St. Paul Fire & Marine (Minn. 19761, 

242 N.W.2d 840, 844 n. 7. We refuse to find the creation of 

the duty on the basis of the pleadings made in this case. 

Affirmed . 

We Concur: 

Justice - 

Justices 
Mr. Justice John 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 Zeiler was sued by Rurns, unilaterally decided 

that it did not have to defend 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. Zeiler made demand upon the insurer to 

defend him in the action brought by Burns, and the insurer 

refused to tender a defense. The result was 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 

that we look to determine whether or not there is a 

duty to defend. The appellant has a duty to defend 

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 50 A.L.R..2d 506-7: 

"Where a complaint alleges facts which represent a 

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 ... 
In McAlear v. St. Paul Ins. Cos. (1972), 158 Mont. 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. In McAlear, 

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 to defend. That case, however, should not be stretched, 

nor those following it, to indicate that an insurer may make 

a unilateral decision not to defend when the allegations of 

the complaint against the insured, taken as a whole, are 

fully within the coverage provided by the insurer. 

When a complaint filed against a putative insured 

contains allegations which, 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 the principle that the duty 

to defend is broader than the duty to pay. If in a 

case there is a potential coverage but the insurer 

believes that the insurer has a valid exclusionary 

coverage defense then the insurer must: 

(1) secure a declaratory judgment of its rights 
while defending the potential insured under a 

reservat.ion of 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 

anomalous position of holding that the insurer had no duty to 

defend, when a default judgment has been entered against its 

putative insured, based on negligence. 

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 it had 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 judgment action, where it was held that 

if the insurer would have no obligation to indemnify the 

insured then it had no contractual obligation to afford a 

defense. 

The point of these cases is that an insurer, if it has a 

valid exclusionary defense based on its policy provisions, 

but the allegations of the complaint against its putative 

insured incl ude potentiai liabili ty , the insurer, to protect 
itself, must proceed to seek a declaratory judgment or 

otherwise begin a supplemental suit to determine the issue of 

coverage before judgment is entered against its putative 

insured, and to proceed 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 that was 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 takes Montana out of the mainstream 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 issue of 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 in 
Sims v. Illinois National Casualty Co. (111. App. 1963), 193 

"An insurer's duty to defend an action against the 

insured is measured, in the first instance, by the 

allegations in the plaintiff's pleadings, and if 

such pleadings state facts bringing the injury 

within the coverage of the policy, the insurer must 

defend, irrespective of the insured's ultimate 

liability to the plaintiff." 

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 conflict of 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 discloses a 

conflict between the allegations of the complaint 

and the actual facts as known to or ascertainable 

by the insurer. 

Again, on page 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 to be 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 reservation of rights or to seek a declaratory 

judgment or a supplemental decision that no insurance 

coverage was involved. This, Underwriters failed completely 
to do. It made the decision, instead of a court, as to 

whether its policy applied. In that situation, it is 

collaterally estopped. 

The reference of the majority to Rule 11, and its 

application in cases where the insurer has 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 violation under which 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 

to be applied. 

~-~9.1, 

Justice 

IL, 'I 

Mr. Justice William E. Hunt, Sr.: 

I concur in the dissent of Mr. Justice Sheehy.