Opinion ID: 411159
Heading Depth: 1
Heading Rank: 13

Heading: was usf & g's refusal to defend justified?

Text: A. The Duty to Defend 31 One of the major contractual rights secured to Hayes by its insurance policy with USF & G was that USF & G assumed the responsibility of defending any claim made against Hayes within the coverage of the policy, even if fraudulent or frivolous. 3 See generally 7C J. Appleman, Insurance Law and Practice (W. Berdal ed. 1979). The primary consideration in evaluating an insurer's duty to defend is whether the pleadings allege a claim within the scope of the coverage of the insurance policy. See id. Secs. 4682-4686. 32 Even if the pleadings do state a claim within the policy's coverage, however, the insurer and insured may have conflicting interests in the management of the defense. For example, if the plaintiff urges alternative claims, only one of which would be covered, the insurer might have an interest in arguing that the true state of affairs establishes the claim not covered. This would not be very satisfactory to the insured. If the insurer simply assumes the defense, the insurer has control over the defense, but must provide a defense for the best interests of the insured. See id. Sec. 4681. There are various ways of handling this problem, such as the insurer defending under a reservation of rights. See id. Sec. 4694. Alternatively, the insured may retain separate counsel. 33 The duty to defend is not breached where the insurer refuses to defend because of a conflict of interest. Thus, although the insurer is not required to defend where there is a conflict of interest, it is not relieved from reimbursing the insured for costs in defending the claim alleged to be within the policy. 34 Id. at Sec. 4685.01, at 141 (footnote omitted). Thus, the inquiry regarding duty to defend has at least two steps: (1) is the claim within the policy's coverage; (2) is there a conflict. B. The Scope of Coverage 35 USF & G has at least two lines of defense for its position that it was justified in its refusal to defend. First, it argued that Ezell's Jones Act claim was outside the scope of Hayes' policy. The policy covers liability for events occurring in Mississippi, with coverage for events outside Mississippi only if incidental to operations within Mississippi. Ezell claimed that he was injured while unloading a barge offshore of Louisiana. USF & G moved for summary judgment on the theory that this claim fell outside the geographic limitations of the policy. Hayes also moved for summary judgment that the claim was covered, based on the theory that the Louisiana contract was incidental to work in Mississippi. 36 The trial judge granted Hayes' motion and denied USF & G's motion. 4 This ruling established coverage, and apparently for the trial judge and Hayes this ruling also established the duty of USF & G to defend Hayes. C. The Conflict 37 USF & G's second line of defense was that a conflict of interest between USF & G and Hayes excused USF & G from assuming the defense--USF & G did not accept the idea that a mere finding of coverage implied it then had a duty to assume the defense of Hayes. USF & G believed that it had a defense available to it that was in conflict with the defenses available to Hayes. Because Hayes refused to allow USF & G to defend under a reservation of rights, USF & G felt it was inappropriate to assume Hayes' defense. If USF & G was correct regarding this conflict, then punitive damages would be improper, so we must now investigate the claimed conflict. 38 The first key to the conflict is that Ezell's status as a seaman under the Jones Act was very much in doubt. At the time of the accident Ezell was unloading sacks of drilling mud from a barge in a Louisiana waterway. Record at III-183. If Ezell were not a Jones Act seaman, his status would probably be that of a longshoreman under the Longshoremen's and Harbor Workers' Compensation Act, 33 U.S.C. Secs. 901-950 (1976). Liability under this Act is available without fault, id. Sec. 904, and defenses such as negligence of a fellow servant, assumption of risk, and contributory negligence are not available to the employer. Id. Sec. 905(a). Furthermore, liability under the Act is exclusive. Id. Thus, it would have been unfortunate for Hayes had Ezell been found to be a longshoreman under the Act. 39 The second key to the conflict is that Hayes' policy with USF & G did not cover liability under the Longshoremen's and Harbor Workers' Compensation Act. The policy had two basic types of coverage. Coverage A covered only Mississippi workmen's compensation claims. Coverage B covered claims for injury by accident or disease from operations in Mississippi or elsewhere if necessary or incidental to operations in Mississippi. This is not the end of the story, however, because Exclusion (f) specifically removes any kind of workmen's compensation claim from the scope of Coverage B. See Record at I-151. The Longshoremen's claim is not covered under Coverage A and is removed from Coverage B by Exclusion (f). Counsel for Hayes admitted at trial that Hayes had no coverage for a Longshoremen's claim. Record at IV-121. Thus, it would have been fortunate for USF & G if Ezell were found to be a longshoreman, because that liability is exclusive and not covered by USF & G's policy for Hayes. 5 40 These two factors clearly show the conflict of interest between USF & G and Hayes. USF & G would have been quite happy to defend on the theory that Ezell was a longshoreman; Hayes would not have liked that strategy. Thus, USF & G could not adequately defend both itself and Hayes in the lawsuit, except under a reservation of rights. Given this conflict, we hold that USF & G's refusal to assume Hayes' defense was reasonable as a matter of law. Because USF & G's actions were reasonable and punitive damages may not be assessed for a reasonable refusal to defend, it was error to allow the issue of punitive damages to go to the jury. 6