No. DA 06-0143 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

 

2007 MT 57 

SWANK ENTERPRISES, INC., and ST. PAUL FIRE 

AND MARINE INSURANCE COMPANY, 

Plaintiffs, Respondents 

and Cross-Appellants, 

v. 

ALL PURPOSE SERVICES, LTD., and CONTINENTAL 

WESTERN INSURANCE COMPANY, 

Defendants and Appellants. 

APPEAL FROM: District Court of the Eleventh Judicial District, 

In and For the County of Flathead, Cause No. DV 01-487(A) 

Honorable Ted O. Lympus, Presiding Judge 

COUNSEL OF RECORD: 

For Appellants: 

Karl K. Rudbach; Kaufman, Vidal, Hileman & Ramlow 

Kalispell, Montana 

For Respondents: 

Todd A. Hammer, Angela K. Jacobs; Hammer, Hewitt & Jacobs, 

Kalispell, Montana 

Submitted on Briefs: January 4, 2007 

 Decided: March 5, 2007 

Filed: 

__________________________________________ 

Clerk 
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Justice W. William Leaphart delivered the Opinion of the Court. 

¶1 Plaintiffs Swank Enterprises, Inc. (Swank) and St. Paul Insurance Company (St. Paul) 

filed a declaratory action seeking affirmation that defendant Continental Western Insurance 

Company (Continental) had a duty to defend Swank and was thus liable for the settlement 

paid to the City of Libby on Swank’s behalf by St. Paul. Continental denied the allegation, 

claiming that the policy’s provisions excluded coverage for Swank, an additional insured. 

The District Court, concluding that the policy did provide coverage for Swank, entered 

summary judgment against Continental for the settlement amount plus attorney fees. We 

affirm in part, reverse in part, and remand for further proceedings.

¶2 Continental raises three issues on direct appeal:

¶3 I. Did the District Court err in concluding that the 1997 policy was the applicable 

policy? 

¶4 II. Did the District court err in concluding that the policy exclusions, all of which 

addressed the “named insured,” did not apply to Swank, an “additional insured?” 

¶5 III. Did the District Court err by holding Continental liable for the entire settlement 

amount, as opposed to a pro-rated amount with St. Paul?

¶6 Additionally, Swank raises the following issue on cross-appeal:

¶7 IV. Did the District Court err by not awarding prejudgment interest?

BACKGROUND 
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¶8 In November of 1996, Swank and the City of Libby entered into a contract for the 

construction of a water treatment plant. Swank subsequently entered into a subcontract with 

All Purpose Services (All Purpose) to paint the filter tanks and pipes at the treatment plant. 

The contract between Swank and All Purpose called for All Purpose to designate Swank as 

an additional insured on All Purpose’s commercial general liability insurance. Continental 

provided this insurance to All Purpose under two policies, both of which listed Swank as an 

additional insured. One policy was in effect from January 25, 1997 to January 25, 1998 (the 

1997 policy), and the second was in effect from January 25, 1998 to January 25, 1999 (the 

1998 policy). 

¶9 All Purpose selected the paint and painted the tanks and pipes from December 1997 to 

early February 1998. After All Purpose finished the job it was discovered that All Purpose 

had used an improper type of paint. The treatment plant’s tanks and pipes were stripped and 

repainted and the treatment plant was shut down for the duration of the repair work. The 

City of Libby consequently sued Swank for the costs associated with repainting the pipes, 

alleging that: (1) Swank, as the general contractor, acted negligently by failing to properly 

coordinate the work of All Purpose, by not ensuring that All Purpose was using the correct 

type of paint and by not stopping All Purpose’s work; and (2) Swank was vicariously liable 

for All Purpose’s negligence. 

¶10 Swank tendered defense of the City of Libby’s claim to Continental based on Swank’s 

status as an additional insured and made a demand upon Continental for indemnity. 

Continental refused to defend or indemnify Swank, citing to exclusions (j), (k), (l), and (m) 
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of its policy with All Purpose as support for its position that the policy did not provide 

coverage to Swank for the City of Libby’s claim. Swank then tendered the City of Libby’s 

claim its own insurer, St. Paul. St. Paul reached a settlement with the City of Libby, and 

issued a payment of $120,102.42 to the City of Libby on December 7, 2000. St. Paul issued 

an additional and final payment to the City of Libby for $27,899.35 on December 21, 2000, 

for a total settlement of $148,001.77. 

¶11 Swank and St. Paul then brought a declaratory action against Continental and a claim 

seeking indemnification against All Purpose. Continental initially defended its position that 

no coverage existed based strictly on the exclusions contained in the 1997 policy. In fact, 

when Swank requested a copy of the applicable policy, Continental provided it with a copy 

of the 1997 policy. However, by the time Continental submitted its summary judgment 

motion and accompanying brief it was no longer relying on the terms of the 1997 policy, but 

on the 1998 policy, and was implicitly arguing that the 1998 policy applied and that the 

exclusions in that policy precluded coverage for the City of Libby’s claims against Swank. 

Swank responded that, because the improper paint was applied during the coverage period of 

the 1997 policy, that policy and its exclusions apply. Swank also argued that the exclusions 

in the 1997 policy apply only to the “named insured,” All Purpose, and not to Swank, as an 

“additional insured.” The District Court agreed with Swank, and concluded that Continental 

is liable for the settlement amount as well as costs and attorney fees, but that prejudgment 

interest is not appropriate because the amount of liability was in controversy and therefore 

uncertain until the court entered judgment. 
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¶12 Continental appeals the District Court’s grant of summary judgment for Swank and 

Swank cross-appeals the court’s denial of prejudgment interest.

STANDARD OF REVIEW 

¶13 We review a district court’s grant of summary judgment de novo. Montana Mountain

Products v. Curl, 2005 MT 102, ¶ 8, 327 Mont. 7, ¶ 8, 112 P.3d 979, ¶ 8 (citations omitted). 

The district court must decide whether there exists any genuine issue of material fact. If none 

exists, the district court must then decide whether to grant the motion as a matter of law. 

Montana Mountain Products, ¶ 8 (citations omitted). 

¶14 We review a district court’s decision to grant or deny an award of prejudgment 

interest to determine if the District Court’s interpretation of the law is correct. Ramsey v. 

Yellowstone Neurological Assocs., 2005 MT 317, ¶ 18, 329 Mont. 489, ¶ 18, 125 P.3d 1091, 

¶ 18 (citations omitted). 

DISCUSSION 

¶15 I. Did the District Court err in concluding that the 1997 policy was the 

applicable policy? 

¶16 The 1997 policy, by its terms, only applies to “property damage” that occurred during 

the policy period. The 1997 policy defines “property damage” as:

a. Physical injury to tangible property, including all resulting loss 

of use of the property. All such loss of use shall be deemed to occur at the 

time of the physical injury that caused it; or 

 b. Loss of use of tangible property that is not physically injured. 

All such loss of use shall be deemed to occur at the time of the “occurrence” 

that caused it. 
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All parties agree that the “loss of use” of the treatment plant occurred after the 1997 policy 

expired. The question, then, is whether the selection and application of paint to the pipes and 

tanks by All Purpose, which did occur during the 1997 policy period, constituted “physical 

injury to tangible property.” We conclude that the application of improper paint did cause 

“physical injury” to the pipes and tanks. The 1997 policy thus applies to all damage suffered 

by the City of Libby because the resulting loss of use is “deemed to occur at the time of the 

physical injury that caused it.” 

¶17 Continental, citing to Endo Laboratories, Inc. v. Hartford Ins. Group, 747 F.2d 1264, 

1268 (9th Cir. 1984), argues “that the time of the occurrence of an accident within the 

meaning of an indemnity policy is not the time the wrongful act was committed, but the time 

when the complaining party was actually damaged.” While Continental agrees that the paint 

was applied during the 1997 policy period, it categorizes the application of the improper 

paint as the “injury-producing act, not the injury itself.” The City of Libby was therefore not 

“actually damaged,” according to Continental, until the plant was shutdown for repainting, 

after the 1997 policy period. 

¶18 Although our case law is sparse on the subject of what, exactly, constitutes “physical 

injury” in the context of a commercial general liability insurance contract, we did consider 

the issue in Lindsay Drilling & Contracting v. U.S. Fidelity & Guarantee Co., 208 Mont. 91, 

676 P.2d 203 (1984). There we considered, among other issues, whether “salting” of core 

samples with gold constituted “physical injury” under a definition of “property damage” that 
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read: “physical injury to or destruction of tangible property . . . .” Lindsay Drilling, 208 

Mont. at 95, 676 P.2d at 205. We concluded that the core samples had been “physically 

injured” because “[t]hey were physically and materially altered when they were salted with 

gold. That alteration resulted in a detriment . . . .” Lindsay Drilling, 208 Mont. at 96, 676 

P.2d at 206. Applying this rationale, we now hold that the term “physical injury” refers to a 

physical and material alteration resulting in a detriment. 

¶19 Here, the application of improper paint during the 1997 policy period caused “physical 

injury” because it physically and materially altered the treatment center’s tanks and pipes, 

resulting in a detriment to the City of Libby. The detriment in fact was that the pipes and 

tanks had to be stripped and repainted. However, even if the City of Libby had taken no 

action (that is, even if the treatment plant had not been shut down and repainted), the City 

still would have been damaged because the paint would not have sufficiently protected the 

pipes and tanks. As with the “salted” core samples in Lindsay Drilling, the application of 

improper paint reduced the value of the pipes and tanks to the City of Libby. 

¶20 Additionally, the fact that the discovery or diagnosis of the problem did not occur until 

after the 1997 policy period is of no consequence. A “physical injury” can occur “even 

though the injury is not ‘diagnosable,’ ‘compensable,’ or manifest during the policy period as 

long as it can be determined, even retroactively, that some injury did occur during the policy 

period.” In re Silicone Implant Litigation, 667 N.W.2d 405, 415 (Minn. 2003) (citations 

omitted). 
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¶21 We hold, therefore, that the 1997 policy applies to the City of Libby’s claims against 

Swank because the application of improper paint to the treatment center’s pipes and tanks by 

All Purpose during the 1997 policy period constituted “property damage.” 

¶22 II. Did the District court err in concluding that the policy exclusions, all of which 

addressed the “named insured,” did not apply to Swank, an “additional insured?” 

¶23 Exclusions (j), (k), (l) and (m), which Continental asserts preclude coverage for the 

City of Libby’s claims against Swank, all address “you” or “your.” The 1997 policy defines 

“you” and “your” as referring to the “Named Insured,” All Purpose. The exclusions at issue 

thus only directly refer to All Purpose. The exclusions apply to “property damage” arising 

out of All Purpose’s operations and “property damage” to All Purpose’s “product.” The 

exclusions, therefore, if applicable, would preclude coverage for damage due to All 

Purpose’s botched paint job. 

¶24 The policy lists Swank as an additional insured, and provides coverage to Swank for 

“liability arising out of [All Purpose’s] operations performed for [Swank].” The policy also 

contains a “severability of interests” clause entitled “Separation of Insureds.” This clause 

provides that the policy applies “[s]eparately to each insured against whom claim is made or 

‘suit’ is brought.” 

¶25 Swank contends, and the District Court agreed, that the “severability of interests” 

clause acts to provide All Purpose, as the named insured, and Swank, as the additional 

insured, with separate coverage, as if each were separately insured with a distinct policy. As 

the exclusions only reference the “named insured,” they do not apply to Swank as an 
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“additional insured.” The only restriction on Swank’s coverage, Swank claims, is that the 

liability “arise out of” All Purpose’s operations for Swank. 

¶26 Continental counters that, while the exclusions do refer to All Purpose and All 

Purpose’s work, they also exclude Swank’s claims that arise from All Purpose’s work 

because the exclusions apply to all claims alleging the described “property damage,” 

regardless of who is seeking coverage. Continental would have no reason to include 

exclusions relating to Swank’s own work, because Swank’s own work is outside the scope of 

coverage. According to Continental, Swank is entitled to full coverage, as a separate insured, 

but not to extra coverage excluded under the policy.

¶27 We are bound to interpret the terms of an insurance contract according to their usual, 

common-sense meaning as viewed from the perspective of a reasonable consumer of 

insurance products. Wendell v. State Farm Mut. Auto. Ins. Co., 1999 MT 17, ¶ 14, 293 Mont. 

140, ¶ 14, 974 P.2d 623, ¶ 14 (citations omitted). Further, exclusions from coverage will be 

narrowly and strictly construed because they are contrary to the fundamental protective 

purpose of an insurance policy. Marie Deonier & Assoc. v. Paul Revere Life Ins. Co., 2000 

MT 238, ¶ 45, 301 Mont. 347, ¶ 45, 9 P.3d 622, ¶ 45 (citations omitted). 

¶28 The language of the exclusions at issue is clear and the reference pronouns are defined 

in the policy. The exclusions clearly refer to “property damage” arising out of All Purpose’s

operations and “property damage” to All Purpose’s “product.” The exclusions do not 

reference Swank. When strictly construed based on their plain language, the exclusions at 

issue do not exclude claims made by Swank, especially when considered in light of the 
10

severability of interests clause. On the other hand, the exclusion section is prefaced by the 

language “[t]his insurance does not apply to” with the list of exclusions following, which can 

be read to exclude coverage to any insured when the underlying damage triggers the 

exclusion. 

¶29 The exclusions at issue, therefore, can be read two ways: either the exclusions only 

apply to All Purpose, since they specifically reference the named insured, or the exclusions 

arise from the actions of the named insured but apply to any insured seeking coverage. In 

other words, the language of the exclusions is ambiguous. An ambiguity exists when the 

contract taken as a whole in its wording or phraseology is reasonably subject to two different 

interpretations. Wendell, ¶ 14 (citations omitted). Ambiguities in the language of the 

contract will be construed against the insurer. Wendell, ¶ 14 (citations omitted). 

¶30 As further evidence of ambiguity, we need only consider the amended endorsement to 

the 1998 policy, entitled “Additional Insureds,” which expressly provides, unlike the 1997 

policy, that “all exclusions” apply to “additional insureds.” Logic dictates one of two reasons 

for the change. Continental changed the policy so that the exclusions referring to “you” and 

“your” would also apply to additional insureds, which implies that the exclusions did not 

apply to additional insureds under the 1997 policy, or Continental sought to clarify that the 

exclusions apply to additional insureds, which indicates that the 1997 policy was ambiguous. 

¶31 We conclude, therefore, that the 1997 policy, in regards to the exclusions at issue, is at 

best ambiguous. Keeping in mind that exclusions are to be narrowly construed, we uphold 

the District Court’s determination that the exclusions did not apply to Swank and the court’s 
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corresponding conclusion that Continental had a duty to defend the City of Libby’s claim 

against Swank. 

¶32 III. Did the District Court err by holding Continental liable for the entire 

settlement amount, as opposed to a pro-rated amount with St. Paul? 

¶33 Continental claims that the District Court should have pro-rated the settlement amount 

between Continental and St. Paul, Swank’s primary insurer. Continental, citing to Mountain 

West Ins. Co. v. Credit General Ins. Co, 247 Mont. 161, 163-64, 805 P.2d 569, 570-71 

(1991), notes that when two insurance policies apply to the same loss, the “other insurance” 

policies should be examined to determine the proper allocation of the loss. Continental thus 

requests that this action be remanded for an allocation of the settlement. 

¶34 Continental, however, did not directly raise this issue below. Continental only argued 

that, if coverage applied to Swank, Continental was an excess insurer (under the 1998 policy) 

and thus had no liability as St. Paul, the primary insurer, had fully covered the settlement 

within the limits of its policy. In fact, Swank, not Continental, came closest to raising the 

pro-rata issue by arguing, in its summary judgment reply brief, that, if the 1998 policy 

applied, both insurers should “share equally.” 

¶35 We have made it clear that a party’s theory may not change on appeal, because it is 

fundamentally unfair to fault a district court for failing to rule correctly on an issue it never 

had the opportunity to consider. State v. Johnson, 2005 MT 318, ¶ 13, 329 Mont. 497, ¶ 13, 

125 P.3d 1096, ¶ 13 (citations omitted). Although Continental addressed the larger issue of 

dual coverage, alleging that it was not liable for the settlement because St. Paul was the 
12

primary insurer, it failed to argue that liability should be pro-rated. Further, St. Paul’s policy 

was not introduced into evidence. Consequently, since the District Court had neither the 

theory nor the evidence to rule on the issue, we decline to address it for the first time on 

appeal. 

¶36 Even assuming the issue was raised, Continental would be estopped from denying full 

coverage for Swank’s defense costs and judgment, including settlement, due to its 

unjustifiable failure to defend. See Farmers Union Mut. Ins. Co. v. Staples, 2004 MT 108, ¶¶ 

20-28, 321 Mont. 99, ¶¶ 20-28, 90 P.3d 381, ¶¶ 20-28.

¶37 IV. Did the District Court err by not awarding prejudgment interest? 

¶38 The District Court declined to award Swank and St. Paul prejudgment interest on the 

settlement amount paid to the City of Libby, reasoning that Swank’s “entitlement” to 

damages was “justifiably contested” by Continental, and therefore Swank’s right to recover 

was not certain and did not vest until the court granted summary judgment. Swank contends 

that, while liability was disputed, the amount was not and was made certain when St. Paul 

paid the second and final settlement payment.

¶39 Section 27-1-211, MCA, provides:

Every person who is entitled to recover damages certain or capable of being 

made certain . . . and the right to recover [is vested] upon a particular day is 

entitled also to recover interest thereon from that day . . . . 

The three criteria which must be satisfied for an award of prejudgment interest are: (1) an 

underlying monetary obligation; (2) the amount of recovery must be certain or capable of 

being made certain by calculation; and (3) the right to recover must vest on a particular day. 
13

Safeco Ins. Co. v. Lovely Agency, 215 Mont. 420, 424, 697 P.2d 1354, 1356 (1985) (citations 

omitted). However, “[t]he fact that a claim is disputed does not make it uncertain,” as long as 

the damage amount is reduced to certainty on a particular day. Lovely, 215 Mont. at 425, 697 

P.2d at 1357 (citations omitted). 

¶40 Here, the amount of the obligation has been certain since St. Paul paid the second and 

final settlement payment to the City of Libby. The fact that Continental disputed its liability 

to defend or insure Swank does not make the amount uncertain. The amount owed was 

reduced to a particular figure, $148,001.77, on December 21, 2000, and Swank’s right to 

recover correspondingly vested on that day. Swank and St. Paul are thus entitled to 

prejudgment interest on the settlement paid to the City of Libby. 

CONCLUSION 

¶41 We affirm the District Court’s determination that the 1997 policy is the applicable 

policy, that the exclusions in the 1997 policy do not apply to the City of Libby’s claim 

against Swank, and that Continental is therefore liable to Swank and St. Paul for the 

settlement paid by St. Paul to the City of Libby on Swank’s behalf. 

¶42 However, we reverse the District Court’s denial of prejudgment interest, and remand 

for further proceedings consistent with this opinion.

/S/ W. WILLIAM LEAPHART 

We concur: 

/S/ JOHN WARNER 

/S/ JIM RICE 
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/S/ JAMES C. NELSON 

/S/ BRIAN MORRIS