No. 12113 INTHE SUPREME COURT OF THE STATE OF MONTANA 1972

ALLEN 

### L. McALEAR, Plaintiff and Respondent,



### SAINT PAUL INSURANCE COMPANIES, a Corporation, Defendant and Appellant.

Appeal from: District Court of the Fourteenth Judicial District, Honorable Nat Allen, Judge presiding

# . Counsel of Record: For Appellant: Patrick Fw Hooks argued, Townsend, Montana. Glenn Fw Kenney appeared, Helena, Montana. For Respondent: Allen L. McAlear argued, Bozeman, Montana.

Submitted: January 12, 1972 Decided: 

### JPN

## 311972 Filed:

### 1]fi~q

### 37 *. 1972Mr. Justice Frank 

### I. Haswell delivered the Opinion of the Court. In a declaratory judgment action involving an attorney's professional liability insurance policy, the district court held the insurer liable for the cost of its insured's defense against a third-party property damage action based upon 

### a collision caused by the insured's runaway airplane. From this final judgment, the insurer appeals. The single controlling issue upon appeal is whether the insurer is liable for the costs of such defense incurred by its insured. The district court held the insurer liable. We reverse. The facts in this case are uncontradicted as the case

was submitted on the basis of an agreed statementof factwhich included the pleadings, stipulated exhibits,and discovery proceedings. On November 14, 1969,plaintiff Allen 

### F. McAlear, a Bozeman attorney,purchased a professional liability policy from defendant, Saint Paul Insurance Companies, containing the following insuring agreement and exclusions: "Insuring Agreements "Coverage A 

# - Professional Liability "Topay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages arising out of the performance of professional services for others in the Insured's capacity as a lawyer and caused by the Insured or any other person for whose acts the Insured is legally liable (theperformance of professional services shall be deemed to include the Insured's acts as an administrator, conservator, executor, guardian, trustee or in any similar fiduciary capacity,but only to the extent for which in the usual attorneyclient relationship the Insured would be legally responsible as attorney for a fiduciary)and theCompany shallhave the right and duty todefend inhisname and behalf any suit against the Insured allegingdamages, even if such suitis groundless, falseor fraudulent; but the Company shallhave the right tomake such investigation and negotiation of any claim or suitasmay be deemed expedient by the Company. The Company, however, shallnot make settlementor compromise any claim or suit without the written consent of the Insured." The "Exclusions" sectionof the policy specifically provides: "Coverage A does not apply:

"(3)tobodily injury to, 

### or sickness, disease 

### or death of any person, ortoinjury 

### toor destruction of any tangible property, including the loss of use thereof." During thepolicy period McAlear flew toSaltLake City with a client, Robert S. Beck. Beck had contactedMcAlear regarding the purchase of a trailer and it was necessary forthem togo toSaltLake City

### toobtain financing from 

### a private individual. As the sellers were insolvent it was necessary 

### tocomplete the transaction and get the titlerecorded before liens could be recorded against the seller's equity inthe trailer. Beck and McAlear had flown to SaltLake Cityon March 20, 1969, inMcAlear's plane forthispurpose. They transacted their business on March 21and 22. Atabout 6:00 a.m. on March 23, while preparing toreturn toBozeman, McALear was engaged ina preflight inspection of hisplane. He manually turned over the propellor while the ignitionwas inthe "on" position. This caused the pilotless airplane toaccelerate down the ramp and crash intothree other airplanes.

### On May 21, 1970,an action was filed in the United States District Court in Utah by Gordon S. 

### Burchett, the owner of one of the damaged planes. The Burchett action sought damages against McAlear for his alleged negligence and sought recovery of repair costs,depreciation and loss of use of Burchett's airplane. McAlear's professional liability policy with his insurer, Saint Paul Insurance Companies, is the sole basis for his claim in the instant declaratory judgment action. He demanded of Saint Paul that it defend him in the Burchett action. Saint Paul denied this demand on the basis that his policy afforded no coverage and accordingly it owed him no duty to defend. McAlear then hired his own attorney to defend in the Burchett action. Thereafter McAlear brought the instant declaratory judgment action against Saint Paul seeking a judgment holding it* liable for the reasonable costs of his defense. The case was filed in the district court of Meagher County and submitted to the district court, sitting without a jury, for decision on the basis of an agreed statement of facts. The district court on July 2, 1971 entered an "Order",in effect the judgment,providin material part: "IT IS HEREBY ORDERED,ADJUDGED AND DECREED, that the Plaintiff recover for his cost of defense in the suit brought against him.

"Itappears to the Court that the policy was carelesslywritten, and since this is the fault of the insurance company, they should pay for their own carelessness,because certainly the duty to defend is not limited to the liability of the policy."Following denial of insurer's motion that the court enter written findings of fact and conclusions sf law, the insurer appeals, The thrust of insurer's position inthe instant case is that its duty todefend is limited 

### to claims against the insured within the coverage of the policy. The insurer contends thatwhere, ashere, there is no primary indemnity coverage for the Burchett accident, it has no duty to defend. Insurer points out that the basic insuring agreement inthe policy (Coverage A), properly construed, solimitsthe duty todefend and that the policy contains an express exclusion of property damage claims (Exclusion 3). On the other hand, the gistof the insured's position is that the duty todefend is contractual and where, as here, the duty todefend is unrestricted by the terms of the policy, the duty todefend is not limited tothe primary indemnity coverage of the policy. According tothe insured, the duty todefend in the instant case is entirely independent of the primary indemnity coverage of the policy. Thus, the insured argues, where the Burchett complaint fallswithin the scope of the "duty to defend" provision inthe policy, the insurer is obligated to defend without regard tothe primary indemnity coverage afforded by the policy. As a corollary tothis argument, the insured insists that the exclusion of property damage claims from the primary indemnity coverage afforded by the policy inno way limitsthe duty of the insurer todefend.Ordinarily a liability insurer has no duty todefend

an action against the insured when the claimorcomplaint does

not fallwithin the coverage of the liability policy. If the insurer would have no obligation toindemnify the insured should the complainant recover, then there is no contractural obligation toafford a defense. This general rule is succinctly stated in 50 ALR2d atpage 472, as follows: " 

## * * * a liability insurance company has no duty todefend a suitbrought by a third party against the insured where the petition or complaint in such suitupon its face alleges a stateof factswhich fails tobring the case within the coverage of the policy. Consequently the company is not required todefend if it would not be bound toindemnify the insured even though the claim against him should prevail in that action." To like effect see 49 ALR2d 703; 114U. of Pa. Law Review.734, "The Insurer's Duty toDefend Under a Liability Insurance Policy" pp. 747-749, 757; 7A Appleman Ins. L. & P., S 4685, pp. 462, 471. The allegations in the complaint against the insured determine whether there is coverage under the policy. This general rule iswell stated in 44 AmJur 23, Insurance, 

## s 1539; "Upon the basis of the allegations of the complaint orpetition, the courts have adopted the following tests fordetermining whether particular allegations require the insurer to defend the action brought against the insured: if the complaint in the action brought against the insured upon its face alleges facts which come within the coverage of the liabilitypolicy, the insurer is obligated to assume the defense of the action; but if the alleged facts fail tobring the case within the policy coverage, the insurer is free of such obligation, at least initially. Stated differently, the insurer is under an obligation todefend only if it could be held bound to indemnify the insured, assuming thatthe injured person provedthe allegations of the complaint, regardless of the actual outcome of the case. 

## * 

## * *" Measuring the Burchett claimagainst the policy provisions here, it is clear thatBurchett's action is a property damage claim seekingmoney damages forMcAlear's alleged negligence indamaging Burchett's plane, depreciation initsvalue, and loss of itsuse. The policy expressly excludes from coverage "injury toordestruction of any tangibleproperty, including the loss of use thereof". Under such circumstances there is

no duty todefend, ashas been wellexpressed by theMichigan Supreme Court inDuval v. Aetna Casualty & Surety Co., 304 Mich.

"The insurer isnot required todefend the insured against claims expressly excluded from coverage inthe policy, The exception inthepolicy is a part of the contract between theparties. The duty of the insurance company todefend was not independent of the duty topay damages, if any, The two provisions arenot separable." However, McAlear contends thatthe "duty todefend" provision of his policy isunique, thereby takinghis case outside the scope of the generalrule. He points outthat the basic insuring agreement, Coverage A, provides inmaterial part "the company shallhave the

## * * 

## * duty todefend

## * * 

## * any suitagainst the Insured alleging damages, even if such suitis groundless, false or fraudulent", He further contends thisprovision constitutes an unrestricted contractual obligation on the part of the insurer todefend without regard tothe primary indemnity coverage afforded by thepolicy. McAlear contends thatbecause such language neither refers tonor restricts the duty todefend todamage actionswithin the coverage of the policy, any suitfor

### damages within the scope of the "duty to defend"provisions of the policy imposes such duty on the insurer. For emphasis, he points out that under coverage B 

### in the policy (notpurchased by the insured in the instant case) the duty to defend is restricted by the following language: 

### " 

## * * 

## * 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

## * * 

## *". Regarding interpretation of the terms of the policy here, the insured insists that an insurance policy differs from an ordinary contract between two persons in that there is no true negotiation and bargaining between the insurer and the insured in arriving at the terms of an insurance policy; that the terms of the policy are standardized by the insurer and offered to the insured on a "take-it-or-leave-it"basis; and that the insured really has nothing to say about the policy terms because of his lack of any real bargaining power with the insurer. The insured here reminds us that because of such circumstances existing in non-negotiated "adhesion" contracts such as insurance policies, a11 doubts as to the meaning of the terms in the policy must be resolved in favor of the insured and against the insurer. We recognize this principle of interpretation of "adhesion" contracts as expressed by the California Supreme Court in Gray v, Zurich Insurance Company, 65 C.2d 263, 419 P.2d 168, 171: 

### "Although courts have long followed the basic precept that they would look to the words of the contract to find the meaningwhich the parties expected from them, they have alsoapplied the doctrine of the adhesion contract toknsurance policies, holding that inview of the disparate bargaining status of the parties we must ascertain thatmeaning of the contract which the insured would reasonably expect.

### " (EmpHasis added.) The Montana Supreme Court has previously recognized this same test inthe following language from St. Paul Fire & Marine Ins. Co. v. Thompson, 150 Mont. 182, 187, 433 P.2d 795: "Again looking tothe Kansas rulewhich we have adopted, we find that, 'the test is not what the insurer intended the words of the policy tomean but what a reasonable person inthe position of an insured would understand them tomean. 

### '" Applying this test tothe instant case, would a reasonable lawyer expect that hisprofessional liabilitypolicy obligated his insurer todefend him against damage suitsexpressly excluded from the primary indemnity coverage of the policy? Or put another way, would a reasonable lawyer understand thathis professional liabilitypolicy obligated his insurer todefend him against alldamage suitsof whatever nature? Wehold that a reasonable lawyer would no more understand that his professional malpractice policy obligated his insurer todefend him against damage claims arising out of an airplane accident than against damages arising out of an assault, an automobile accident, or a fallon the steps of his residence. Both McAlear and the district court rely heavily upon the holding of thisCourt inThompson for the proposition that the duty todefend isbroader than the primary indemnity coverage under an insurance policy. There we said atp. 188,

### "'"Theprinciple that 'theduty to defend is broader than the duty to pay' is now beyond cavil." The agreement to defend is not a covenant subordinate to or dependent on the agreement to indemnify; it is distinct from, different from, independent of, and broader than the insurer's promise to pay on behalf of the insured all sums which the insured shallbecome obligated to pay by reason of the liability imposed upon him by law for damages because of bodily injury. There is no language in the policy making the defense covenant dependent on the amount of liability for bodily injury. The defense covenant is clear,positive and unambiguous, and should be accorded its plain and ordinarymeaning.' Comunale v. Traders & 

### Gen. Ins. Co., 321 P.2d 768, 773, 

### (Cal.App.) 

### " Thompson is clearly distinguishable and must be construed in the light of the facts of that case. There the insured carried

an automobile liability policy with State Farm Mutual Insurance Company. In prior litigation State Farm had paid the limits of the policy on a judgment against Thompson and argued that it had

no further duty to defend Thompson. We held otherwise. The distinction is that in Thompson the claim against the insured was 

### clearly within the primary indemnity coverage of his policy, while here Burchett's claim is clearly outside the primary indemnity coverage. In Thompson the insurer urged that itwas relieved of its duty to defend because of payment of the liability limits, whereas in the instant case there can never be any obligation on the part of the insurer to pay any judgment in the Burchett action. Additionally, in Thompson, the duty to defend was contained in one portion of the policy, while the duty to pay was 

### contained in another; here the duty to defend and the duty to pay are all included in one sentence. Thus, Thompson isno authority for the proposition that an insurer's duty to defend extends to cases outside the primary indemnity coverage of the policy. For the foregoing reasons the judgment of the district court is reversed and the cause dismissed.

Associate Justice