Opinion ID: 876072
Heading Depth: 2
Heading Rank: 2

Heading: National Union Fire Insurance Company

Text: ¶45 As did Scottsdale, National Union also argues on appeal that the District Court erred in determining it had breached its duty to defend its insured. ¶46 National Union provided excess insurance coverage for Teen Help from May 7, 2004, through May 7, 2005. Karlye died in October 2004. Newman filed her initial Complaint against Lichfield and others in October 2006. This Complaint did not name Teen Help as a defendant. She filed her Second Amended Complaint adding Teen Help 19 as a defendant on May 29, 2008, but it is unclear whether Teen Help was served with this complaint. Ultimately, she filed a Third Amended Complaint on December 29, 2008, and served Teen Help at that time. It is undisputed Teen Help did not notify National Union of the suit nor did it tender a request for defense at that time. ¶47 National Union first learned of the cause of action in January 2010 when Newman’s counsel submitted a policy limit demand letter directly to National Union. The letter encouraged National Union to participate in a court-ordered settlement mediation scheduled for February 19, 2010. Upon receipt of the letter, National Union contacted Teen Help to obtain information and documentation. Teen Help was of marginal assistance, at best. National Union then contacted Scottsdale’s attorney to obtain information. Scottsdale provided National Union with a copy of the Third Amended Complaint and informed National Union that Scottsdale declined to defend or indemnify Teen Help because Newman’s claim was precluded under the professional liability exclusion contained in Scottsdale’s policy. ¶48 After reviewing the Third Amended Complaint, National Union, in a letter dated February 9, 2010, denied coverage to Teen Help on the following policy coverage grounds: failure to exhaust primary coverage through Scottsdale, failure to establish that Scottsdale’s policy did not cover the claim, failure to state a claim that constituted an “occurrence,” and submission of a claim that was excluded under the policy’s professional liability exclusion. Notably, at that time, National Union did not deny coverage based upon Teen Help’s failure to notify it of the underlying lawsuit “in writing as soon as practicable.” 20 ¶49 Having denied coverage, National Union did not attend the settlement mediation but nonetheless encouraged Teen Help to contact it with questions or further information upon which it could reconsider its decision. It is undisputed that Teen Help did not contact National Union with additional information or requests for assistance. ¶50 Subsequently, in August 2010, Newman initiated this action. In its early filings in response to Newman’s complaint and her motion for summary judgment, National Union continued to assert that it had no duty to defend Teen Help based upon the policy coverage grounds set forth above. In its March 2011 response to Newman’s motion for summary judgment, National Union argued for the first time that Teen Help failed to notify it of the lawsuit in a timely manner and that it was unfairly prejudiced by the lack of notice. It asserted that the duty to notify was a “condition precedent to filing a lawsuit against National Union for any claim, including a breach of contract claim.” ¶51 In October 2011, the District Court granted Newman’s motion for summary judgment and denied National Union’s motion to dismiss the action. In its order, the court based its conclusion that National Union had a duty to defend Teen Help upon a determination that Teen Help was not a “professional” entity; therefore, the insurer could not rely upon the “professional services liability” exclusion in its policy. The court did not address the other defenses raised by National Union. Following entry of this order, Newman moved for a hearing to determine attorney’s fees, costs and interest and for entry of judgment. In December 2011, National Union responded to Newman’s motion, arguing again that a judgment against it was barred based upon “lack of notice” and a failure by Teen Help to “tender a defense.” National Union asserted that it was 21 prejudiced in numerous ways by the passage of more than six years since Karlye’s death and more than a year since Teen Help was served with a complaint. Unpersuaded, the court subsequently entered Judgment against both insurers, severally, as described above. ¶52 On appeal, National Union argues that its policy identified only two circumstances under which it had an obligation to defend Teen Help: (1) when the policy limits of Scottsdale’s policy were exhausted by payment of settlement or judgment, and (2) when damages were sought for bodily injury covered by National Union’s policy, but not covered by Scottsdale’s policy. National Union claims that neither of these provisions was satisfied. Additionally, it claims that under the terms and definitions of the policy, Newman’s claim did not constitute an “occurrence.” The insurer further posits that the claim was precluded under the professional liability exclusion. Lastly, National Union maintains that Teen Help did not notify it of the filing of Newman’s lawsuit and never made a demand upon it to tender a defense. The insurer asserts the District Court failed to enforce the contract as drafted and as required under well-established case law; therefore, judgment against National Union should be reversed. ¶53 Although the District Court addressed only the professional liability exclusion in its decision, we address the remaining arguments presented by National Union as well as the argument upon which the District Court ruled. Exhaustion or Inapplicability of Scottsdale coverage ¶54 Reiterating that the case before us is a “duty to defend” case, we return to National Union’s initial denial of coverage which precipitated its refusal to defend. In National Union’s February 2010 denial letter, it claimed that its “coverage obligations have not 22 been triggered, as no information has been presented evidencing that all underlying coverage has been exhausted and/or that underlying coverage does not apply to this claim.” The denial letter acknowledged, however, that National Union had been informed by Scottsdale that Scottsdale disclaimed liability based upon a professional liability exclusion contained in Scottsdale’s policy, and that therefore Scottsdale’s policy would not cover Newman’s claim. National Union then denied coverage based upon its policy’s professional liability exclusion, among other grounds. ¶55 National Union’s position on this issue is somewhat confusing. At various times, it has acknowledged that Scottsdale’s policy did not cover Newman’s claim, and at other times argues that Scottsdale’s policy did cover Newman’s claim but Scottsdale failed to pay, and therefore Scottsdale’s coverage had not been exhausted. Moreover, on appeal National Union presented the following issue: “Whether [National Union] had a duty to defend its insured under its Umbrella Commercial General Liability Policy for a claim that is not covered under the policy and, where unbeknownst to [National Union], the insured’s primary insurer, Scottsdale Insurance Company declined to do so because the claim was not covered under its policy.” As noted, the record indicates that National Union knew at the time it denied coverage to Newman’s counsel, that Scottsdale had concluded that its policy did not cover Newman’s claim for bodily injury. This knowledge raised the distinct prospect that National Union’s duty to defend was triggered. ¶56 As acknowledged by National Union, an insurer has no obligation to look beyond the complaint in determining whether a claim is covered by a policy. What National 23 Union does not acknowledge is that once an insurer does look beyond a complaint, it may not then ignore the information obtained. Revelation Indus. v. St. Paul Fire & Marine Ins. Co., 2009 MT 123, ¶ 30, 350 Mont. 184, 206 P.3d 919. National Union’s knowledge of Scottsdale’s position on coverage was not obtained through a review of Newman’s Third Amended Complaint or the National Union policy but rather through communication with Scottsdale. As such, National Union became privy to facts beyond the allegations in Newman’s Complaint, triggering the prospect of a duty to defend and/or indemnify based on the information discovered. Revelation Indus, ¶ 30. ¶57 As we explained in our Scottsdale analysis above, there must exist an unequivocal demonstration that the claim against the insured does not fall within the policy coverage before an insurer can refuse to defend; otherwise, the insurer has a duty to defend. Staples, ¶ 24. If an insurer unjustifiably refuses to defend a claim, that insurer is estopped from denying coverage. Staples, ¶¶ 27-28. ¶58 National Union’s contention that it was entitled to reject Newman’s request for a defense based upon the absence of evidence of Scottsdale’s position on coverage is disingenuous. Moreover, Scottsdale’s position on coverage could not supply an “unequivocal demonstration” that the claim did not fall under National Union’s policy. Against this backdrop, we examine the other arguments posited by National Union. “Occurrence” ¶59 National Union argued to the District Court and to this Court on appeal that in light of the fact that suicide is an intentional act, Newman’s claim does not constitute an “occurrence”; therefore, the insurer was justified in denying coverage and refusing to 24 defend. The definition of “occurrence” in the policy requires that there be an injury “neither expected nor intended from the standpoint of the Insured.” The Insured is Teen Help. Certainly, it did not expect or intend Karlye’s suicide; therefore, her suicide could arguably constitute an “occurrence” as defined in the policy. Interposing Karlye’s intent as determinative of the existence of an “occurrence” makes no sense under the contract because she is not the Insured. We therefore reject National Union’s argument that it was excused from defending Teen Help because Karlye’s suicide, being intentional, did not fall within the definition of an “occurrence.” ¶60 National Union’s interpretation of the term “occurrence” in a manner that precludes coverage does not supply an “unequivocal demonstration” that the claim is not covered under National Union’s policy. National Union therefore was not justified in refusing to defend its insured based upon this defense. Professional Liability Exclusion ¶61 We need not repeat the legal analysis set forth above vis-à-vis Scottsdale’s professional liability exclusion. It is sufficient to note that the same analysis applies to National Union’s policy and argument. Additionally, National Union’s policy does not define terms used in this exclusion, i.e., “arising out of,” “professional,” or “professional nature.” As we noted above, without such definitions, the exclusion fails to alert the insured as to what services are covered and what services are excluded, thereby rendering it confusing and ambiguous. We construe this exclusion against National Union. Wendell, ¶ 14. 25 ¶62 Furthermore, as we explained above, exclusions are contrary to the fundamental purpose of an insurance policy. The mere existence of exclusions in the insurance policy, even exclusions that are not construed against the insurer, do not establish an “unequivocal demonstration” that the claim does not fall within the policy’s coverage. Notification ¶63 Lastly, National Union argues that because Teen Help did not timely notify it of the underlying law suit or tender a defense, it could not have breached its duty to defend. ¶64 As noted above, in February 2010, National Union denied coverage to Teen Help based on its policy definitions and exclusions. In later seeking to dismiss Newman’s claim in this case on February 7, 2011, it argued to the District Court that the definitions and exceptions under the policy established it owed Teen Help no duty of defense or indemnification. Subsequently, in March 2011, National Union first raised the argument that Teen Help failed to timely provide it with notice of the claim and that it was prejudiced by the failure. The insurer repeated this argument throughout the duration of the District Court proceeding but the court was not persuaded. ¶65 On appeal, and relying upon Steadele v. Colony Ins. Co., 2011 MT 208, 361 Mont. 459, 260 P.3d 145, National Union argues that “Montana courts have long held that an insured’s failure to comply with a notice condition in an insurance policy bars recovery under the policy.” National Union maintains that the District Court erred by not considering the prejudice suffered by National Union based upon Teen Help’s failure to notify it of Newman’s claim. 26 ¶66 In Steadele, we concluded that the district court properly granted the insurer’s motion for summary judgment based upon its complete lack of notice of the pendency of any claim against its insured, until more than 60 days after a default judgment in the approximate amount of $1.88 million had been entered in favor of Steadele and against the insured. Steadele, ¶¶ 8, 23. When Steadele attempted to recover the judgment amount from Colony, Colony argued that the lack of notice of the claim severely prejudiced it. We observed that because of the lack of notice, Colony was completely deprived of the ability to investigate, locate witnesses, appoint counsel or negotiate a settlement and therefore suffered prejudice. Steadele, ¶ 28. ¶67 There are notable distinctions between Steadele and the case before us. For one thing, National Union was apprised of the pendency of the claim before judgment rather than after, and made the calculated decision to reject the claim on the basis of policy coverage defenses. The most significant distinction, however, is that in Steadele, Colony Insurance asserted from the inception that because the insured never notified it of the litigation, it was deprived of the ability to investigate and assess the validity of the claim. By contrast, upon learning of the litigation against its insured, National Union relied on multiple policy defenses in initially denying coverage to Teen Help, and in later responding to Newman’s complaint. Lack of notice was not raised as a basis for denying coverage until over a year after National Union first refused to defend or indemnify its insured. ¶68 Numerous jurisdictions have held that where an insurer denies liability on some other policy or coverage ground, the insurer cannot thereafter rely on the insured’s failure 27 to give reasonable notice as a ground for avoiding liability. In other words, the insurer waives its right to argue “failure of notice” once it has denied coverage on other grounds. ¶69 In Travelers Ins. Co. v. Peerless Ins. Co., 287 F.2d 742, 747 (9th Cir. 1961) (applying Oregon law), the Ninth Circuit Court of Appeals held that if an insurer denies liability to the insured on grounds other than those relating to defects in the notice, compliance with the requirements as to notice will be deemed waived. See also Coulter v. American Employers’ Ins. Co., 78 N.E.2d 131, 136 (Ill. App. 1948) (“It is a well-settled rule that when one party to a contract refuses to perform and bases its refusal on one ground it waived all other grounds, or is estopped when suit is brought, from setting up other grounds for its refusal.”); Travelers Ins. Co. v. Reed Co., 135 S.W.2d 611 (Tex. Civ. App., 1939) (By denying liability on the ground that claimant’s petition against insured contained “no allegation of bodily injury accidentally sustained,” Traveler’s waived its later argument that it did not receive due notice of the suit.); and Great Am. Ins. Co. v. General Ins. Co., 475 P.2d 415, 419 (Or. 1970) (Holding that the rule that defects in notice are waived by a denial of liability on other grounds is “fundamental, and scarcely needs to be supported by the citation of authorities.”). Applying these authorities to the case before us, we conclude that by denying liability on other grounds for over a year after notice of the claim, National Union waived its right to now rely on defects in notice. ¶70 National Union argues that the lack of timely notice of the pendency of the complaint against Teen Help prejudiced its opportunity to investigate the claim, retain counsel, develop a trial strategy, and engage in discovery and perhaps settlement. We 28 reject this argument for two reasons. First, we note that in the cases cited immediately above, prejudice was simply not addressed. This makes sense because, logically, once one waives the right to invoke an argument, the various components of that waived argument—including as here, prejudice resulting from lack of notice—are simply not relevant. Second, even if we were to consider the prejudice argument, it is belied by the fact that National Union made a conscious decision to deny coverage and a defense from the outset, based upon its asserted policy exclusions and defenses. It did not ever seek to retain counsel, investigate the claim, or develop a trial or settlement strategy. Thus, not only is the prejudice argument irrelevant in the face of waiver, it is wholly unsupported in the record. ¶71 For the foregoing reasons, we conclude that National Union has waived its right to now claim that lack of timely notice by the insured is fatal to this case. Further, we conclude that the insurer failed in the District Court and fails here to “unequivocally demonstrate” that Newman’s claims against Teen Help did not fall within the policy coverage. Because coverage of Newman’s claims was arguably available under the National Union policy, it had a duty to defend. It could have attended the mediation in defense of Teen Help, and either negotiated a settlement or insisted upon taking the case to trial. In the meantime, it could have sought a declaratory judgment that it had no duty of indemnification under the policy. Staples, ¶¶ 26, 28; Mt. W. Farm Bureau Mut. Ins. Co. v. Brewer, 2003 MT 98, ¶ 30, 315 Mont. 231, 69 P.3d 652. It did none of these things. Pursuant to the foregoing authorities, we therefore conclude the District Court did 29 not err in denying National Union’s motion to dismiss and granting Newman’s motion for summary judgment against National Union for its refusal to defend Teen Help. ¶72 Did the District Court err in calculating and awarding attorney’s fees to Newman? ¶73 In addition to entering judgment against the insurers for $3,000,000, the District Court also awarded Newman $1,188,399.45 in attorney’s fees, over and above the $3 million judgment. The court explained that established case law allows an insured the right to recover attorney’s fees in the event an insurer breaches its duty to defend. See e.g. Brewer, ¶ 14. The amount awarded was based upon the $3,000,000 judgment awarded in Newman I and the one-third contingency fee arrangement Newman and her attorneys had agreed upon in Newman I. In reaching the fee award, the court considered the eight factors set forth in Stimac v. State, 248 Mont. 412, 417, 812 P.2d 1246, 1249 (1991), which courts have used “when assessing whether to award the full amount of the contingent-fee agreement as a reasonable attorney’s fee . . . .” In Stimac, the plaintiffs had a contingency fee agreement with their counsel, who pursued and recovered on their behalf contested wages from the defendant. The wage recovery statute at issue provided that employees who recovered wages were entitled to the recovery of reasonable attorney’s fees. Section 39-3-214, MCA. ¶74 Scottsdale argues that awarding Newman attorney’s fees in Newman II for work performed in Newman I and based upon the contingency fee agreement entered in Newman I was error. Scottsdale acknowledges that Newman, as assignee, stands in the shoes of first-party insured Teen Help and therefore is entitled to the same fees to which 30 Teen Help would be entitled had Teen Help sued Scottsdale. In other words, Scottsdale maintains that as a first-party assignee, Newman should be allowed to recover only those fees to which Teen Help would be entitled had it directly sued the insurers for declaratory relief. The insurer urges us to reverse the District Court’s ruling vis-à-vis attorney’s fees and remand with instructions to the court to recalculate reasonable first-party fees associated with legal representation in Newman II. ¶75 Newman counters that she has a right to attorney’s fees and that her contingency contract with her attorney is the operative contract upon which to base the amount of fees. She asserts that the method used to calculate attorney’s fees is within the District Court’s discretion and that the court correctly exercised its discretion by holding an evidentiary hearing, taking expert testimony, and applying the factors set forth in Stimac. ¶76 It is undisputed that Newman, as Teen Help’s assignee, should be allowed to recover fees for services rendered by counsel in enforcing the insurance contract, just as first-party insured Teen Help would have been able to do had it instituted the contract and declaratory action against Scottsdale. As we noted in Skauge v. Mountain States Tel. & Tel. Co., 172 Mont. 521, 526, 565 P.2d 628, 631 (1977), “[w]hen there is an assignment of an entire claim there is a complete divestment of all rights from the assignor and a vesting of those same rights in the assignee.” As such, the District Court correctly concluded that Newman was entitled to reasonable attorney’s fees for her declaratory judgment action. ¶77 Where the District Court erred, and as a result abused its discretion, was when it based the amount of the fee award on Newman’s contingency agreement executed in 31 Newman I, and did so in reliance on Stimac. While it is clear that Newman incurred legal fees under the contingency fee contract with counsel in Newman I, Newman I was a separate tort action and the fee arrangement in that case does not transfer to this case. Again, as Newman stepped into Teen Help’s shoes by virtue of the assignment, Newman assumes Teen Help’s rights and nothing more. Skauge, 172 Mont. at 526, 565 P.2d at 631. ¶78 Because Teen Help as assignor had no contingency fee agreement to impose in the declaratory action, it follows that Newman as assignee cannot impose a contingency fee agreement in the declaratory action. Stimac is inapposite, as it analyzed the application of a fee agreement entered for the express purpose of representation in the case before the court, unlike the case here. Thus, it was error for the District Court to import the tort action contingency fee agreement between Newman and her lawyers, into the declaratory action in which Newman was acting as assignee of Teen Help’s rights. ¶79 The foregoing analysis is buttressed by Newman’s arguments on appeal. Newman argued in her brief on appeal that the District Court based its fee award on the services provided by her attorneys in the declaratory action, i.e., Newman II, and not the work performed for Newman I. She stated: The testimony at the evidentiary hearing was directed to the attorneys’ work in the present declaratory judgment and breach of contract case. [Newman I] was only discussed as an example of why contingency fee agreements are reasonable and necessary in litigation. . . . 32 Work performed in [Newman I] was not presented at the evidentiary hearing as basis for the fee award in the present action. The District Court clearly understood that point. ¶80 Because the District Court was tasked with determining a fee award based exclusively on services performed in Newman II, it should not have considered Newman’s contingency arrangement in Newman I or the factors set forth in Stimac. We therefore reverse the amount of the attorney’s fees awarded by the District Court and remand for a calculation of reasonable attorney’s fees based upon what Newman, as Teen Help’s assignee, would have been able to recover for her attorney’s time and expenses incurred in pursuing insurance coverage from the defendants. As we held in Pinski Bros., 160 Mont. at 228, 500 P.2d at 950, the seminal decision addressing the recovery of attorney’s fees in an action between an insurer and insured, “the wrongful acts of the insurer . . . and its refusal to defend this action . . . constituted [a] breach[] of its obligation and duty rendering the insurer liable for damages by way of attorney’s fees, expenses, and court costs occasioned thereby.” See e.g. Lindsay Drilling v. U.S. Fidelity & Guar., 208 Mont. 91, 97, 676 P.2d 203, 206 (1984); Truck Ins. Exch. v. Woldstad, 212 Mont. 418, 423, 687 P.2d 1022, 1025 (1984); Goodover v. Lindey’s Inc., 255 Mont. 430, 448, 843 P.2d 765, 776 (1992). ¶81 Did the District Court err in finding that Montana law controls? ¶82 The District Court concluded, without analysis, that Montana law controlled the declaratory action. Urging this Court to apply the “most significant relationship” test set forth in Tucker, ¶ 41, Scottsdale argues that the insurance policy was issued in Utah, to residents of Utah, covering property in Utah; therefore, Utah law controls. 33 ¶83 Newman responds that, in this case, there is no material difference between Utah and Montana’s principles of insurance contract interpretation; consequently, application of Montana law should be upheld. Modroo v. Nationwide Mut. Fire. Ins. Co., 2008 MT 275, ¶ 23, 345 Mont. 262, 191 P.3d 389. Newman also argues that throughout the District Court proceeding Scottsdale conceded that applicable Montana law was consistent with Utah law, and that the District Court relied on Scottsdale’s concession on this point. Newman asserts Scottsdale may not now challenge the correctness of the District Court’s determination. ¶84 The record supports Newman’s argument. We have repeatedly held that we will not put a district court in error for an action in which the appealing party acquiesced. Horn v. Bull River Country Store Props., 2012 MT 245, ¶ 34, 366 Mont. 491, 288 P.3d 218. Moreover, we do not address a party’s change in legal theory on appeal nor do we render a district court’s decision incorrect when it was not given an opportunity to correct itself. Day v. Payne, 280 Mont. 273, 276-77, 929 P.2d 864, 866 (1996); State v. Weeks, 270 Mont. 63, 85, 891 P.2d 477, 490 (1995).