F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
NOV 13 1997
TENTH CIRCUIT
PATRICK FISHER
Clerk
VALLEY IMPROVEMENT
ASSOCIATION, INC., formerly known
as Horizon Communities Improvement
Association of New Mexico, Inc.,
Plaintiff-Appellee-
Cross-Appellant,
and
INSURANCE COMPANY OF NORTH No. 95-2144
AMERICA, No. 95-2154
Plaintiff-Intervenor-
Appellee,
v.
UNITED STATES FIDELITY AND
GUARANTY CORPORATION,
Defendant-Appellant-
Cross-Appellee.
ORDER ON PETITIONS FOR REHEARING
Filed November 13, 1997
Before KELLY, HOLLOWAY, and WEIS,* Circuit Judges.
*
Honorable Joseph F. Weis, Jr., Senior United States Circuit Judge for the Third
Circuit, sitting by designation.
The Court has reviewed the petitions for rehearing of the Appellant, United States
Fidelity & Guaranty Corporation (USF&G), and of one of the Appellees, Valley
Improvement Association, Inc., and has determined that some modifications of the opinion
of October 20, 1997, should be made in the interests of justice. Therefore, the Court will
issue today a modified opinion, and the opinion of October 20, 1997, is withdrawn and
vacated. For the information of the parties, we note that the modifications to the original
opinion are as follows:
1. Language on page 10 of the previously filed opinion has been
modified to recite correctly the conclusions of law of the district judge and the
provisions of the judgment against USF&G.
2. A new footnote 6 has been added on page 26 of the modified opinion
to clarify the point that the holding in this case is not in conflict with the case
of American General Casualty Co. v. Progressive Casualty Co., 799 P.2d 1113
(N.M. 1990).
3. A new sentence has been added at the end of part V-B, on page 34
of the modified opinion, to instruct the district court on remand to recalculate
the amount of prejudgment interest owed to Appellee Insurance Company of
North America by USF&G.
In all other respects, the petitions for rehearing are denied. The motion for
certification of a question of state law to the Supreme Court of New Mexico is denied.
2
F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
NOV 13 1997
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
VALLEY IMPROVEMENT
ASSOCIATION, INC., formerly known
as Horizon Communities Improvement
Association of New Mexico, Inc.,
Plaintiff-Appellee-
Cross-Appellant,
and
INSURANCE COMPANY OF NORTH No. 95-2144
AMERICA, No. 95-2154
Plaintiff-Intervenor-
Appellee,
v.
UNITED STATES FIDELITY AND
GUARANTY CORPORATION,
Defendant-Appellant-
Cross-Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
(D.C. No. CIV-88-848-LH)
John M. Eaves (David A. Garcia and Lisabeth L. Occhialino with him on the brief), of Eaves,
Bardacke & Baugh, P.A., Albuquerque, New Mexico, for Appellee and Cross-Appellant
Valley Improvement Association of New Mexico, Inc.
Alan R. Wilson (Lawrence M. Glenn and Christina Gratke Nason with him on the brief), of
Dines, Wilson & Gross, P.C., Albuquerque, New Mexico, for Appellee Insurance Company
of North America.
Joe A. Sturges (Matthew P. Holt with him on the brief), of Sager, Curran, Sturges & Tepper,
P.C., Albuquerque, New Mexico, for Appellant and Cross-Appellee United States Fidelity
& Guaranty Company.
Before KELLY, HOLLOWAY, and WEIS,** Circuit Judges.
HOLLOWAY, Circuit Judge.
Plaintiff-appellee/cross-appellant Valley Improvement Association, Inc. (hereinafter
VIA or the insured) brought a state court declaratory judgment action in New Mexico against
defendant-appellant/cross-appellee United States Fidelity & Guaranty Corporation
(hereinafter USF&G) which was removed to federal court and consolidated with other
declaratory actions. These consolidated actions concerned whether VIA’s general liability
insurance carriers, including USF&G, were obligated to defend on VIA’s behalf claims made
against VIA in certain state court litigation. All of the liability insurance carriers except
USF&G eventually settled with VIA, including plaintiff-in-intervention/appellee Insurance
Company of North America (hereinafter INA). INA, having undertaken the defense of the
claims made against VIA, intervened in the instant case seeking to compel USF&G to
contribute to the cost of that defense.
**
Honorable Joseph F. Weis, Jr., Senior United States Circuit Judge for the Third
Circuit, sitting by designation.
2
USF&G appeals from the federal district court’s judgment, which followed a bench
trial, holding that USF&G breached its duty to defend VIA in the underlying litigation in
New Mexico state court. In the alternative, USF&G also contests the amount of the
judgment entered in favor of INA (68.4% of some $1.6 million) and VIA (some $498,000).
USF&G also appeals the district court’s award of attorneys’ fees to VIA for the instant case
(some $301,000 and some $60,800 of prejudgment interest).
VIA cross-appeals from the district court’s decision to strike VIA’s third amended
complaint, by which VIA had attempted to raise for the first time, claims of bad faith breach
of the insurance obligation and a statutory claim of unfair practices. VIA also cross-appeals
from the final judgment on the contention that the district judge erred in not awarding VIA
punitive damages for bad faith or unfair practices. In this part of its cross-appeal, VIA
argues that even after the third amended complaint had been stricken, VIA should have been
awarded all relief supported by the evidence, as provided by Fed. R. Civ. P. 54(c). The
following summary of some of the district court’s findings of fact, although merely a sketch
in broad terms, will serve as the context for the issues to be addressed.
I
Background. The background of this litigation is an apparently ill-fated effort to
develop large tracts of land in Valencia County, New Mexico, which lie about 30 miles south
of Albuquerque. The area now referred to as the Rio Communities consists of approximately
55,000 acres which have been platted into two subdivisions of approximately 100,000 lots.
3
Our record does not reveal how many of these lots were sold by the developer, but we are
informed that only about 6,000 people actually live on these lands.
The developer of this ambitious project was Horizon Corporation. Horizon formed
VIA (which was originally named the Horizon Communities Improvement Association) and
deeded all of the lands to it. VIA retained some of the lands, which were unplatted and were
to be used for purposes such as school sites, parks and green belts. As to the bulk of the
lands, VIA recorded indentures to run with the land and conveyed the properties back to
Horizon. The indentures require, inter alia, the purchasers of lots to pay assessments to
VIA, and require VIA to use these funds for the benefit of the properties collectively, such
as for improvements including streets and drainage systems.
Horizon marketed the properties as risk free and suitable for short term investment.
In administrative proceedings the Federal Trade Commission later determined that Horizon's
marketing practices constituted a “vicious consumer fraud” and that the lands were
particularly ill-suited for short term investment because the size of the development and its
distance from Albuquerque virtually precluded full development until well into the next
century. The FTC found that Horizon had never intended to pursue full development of the
properties.
A group of purchasers of lots within the communities (hereinafter the landowners or
the Yates plaintiffs) brought suit in 1986 against VIA and its individual directors. This
underlying litigation (hereinafter the Yates action or the state court action) is still pending
4
so far as our record shows. It has been the subject of one published opinion. Yates
Exploration, Inc. v. Valley Improvement Association, 773 P.2d 350 (N.M. 1989).2
Approximately one year after the state court action began, VIA made demand on USF&G
for defense of the action. USF&G declined to assume the defense. The instant litigation
concerns primarily whether USF&G was bound to defend the state court action on behalf of
its insured, VIA. As we discuss below, USF&G’s duty, if any, depends on the language of
the policy and the allegations made against VIA by the landowners, which we shall briefly
summarize.
Allegations made against VIA in the state court litigation. The landowners
(sometimes hereinafter the Yates plaintiffs) in the state court litigation sought but were
denied certification of their suit as a class action. The complaint was denominated as a
"Complaint for Accounting, Declarative and Injunctive Relief, Turn Over of Funds,
Damages, and Other Legal and Equitable Relief." II Aplt. App. at 515. The Yates plaintiffs
have amended their complaint at least three times, but many core allegations have remained
essentially unchanged. The original complaint, the one on which VIA’s demand to USF&G
for defense was based, is over thirty pages long. II Aplt. App. at 514-50. The primary thrust
of the complaint is that the landowners had paid as much as $15 million in assessments to
VIA over the years, for which the landowners had received little benefit in improvements to
2
One of the other declaratory actions filed in connection with this matter has also
resulted in a reported decision by the state’s highest court. See Valley Improvement
Association v. Hartford Accident & Indemnity Co., 863 P.2d 1047 (N.M. 1993).
5
the subdivisions. Some of the funds received from the assessments were allegedly used
unlawfully, while the bulk of the funds were simply invested rather than spent for the benefit
of the properties as intended.
The landowners alleged that the assessments are unfairly made, varying greatly from
lot to lot on some unknown, arbitrary basis having no relationship to the relative value of the
lots. It was alleged that VIA had foreclosed against many of the properties to collect unpaid
assessments, while other former owners had permitted the state to seize and sell their
properties for unpaid taxes because the value of the lots had been so diminished by the failure
of the development plans and the burden of the assessments imposed by the indentures. The
landowners prayed for various forms of relief including dissolution of VIA, an accounting
for all assessments received by VIA, invalidation of the indentures, restitution of the
collected assessments, and a catch-all request for other forms of legal and equitable relief.
The Yates plaintiffs’ complaint also alleged wrongful acts and conduct by VIA and
Horizon to the "detriment and damage" of plaintiffs and their class, II Aplt. App. at 531; that
VIA entered into a lease with one Burris permitting him to graze cattle on certain lands for
five years; and that Burris grazed his cattle on the Properties during and after this period.
Id. at 521. The landowners aver that their properties were grazed and overgrazed, which was
wrongful conduct by VIA and Horizon. Id. at 531, 534. These allegations are important in
the consideration of the insurance coverage issues in the instant case, as we shall discuss
below.
6
VIA’s insurance coverage. The Yates landowners’ allegations in the state court
action arguably address conduct by VIA and its directors going back to VIA’s formation in
1969. From a chart prepared by the district court, II Aplt. App. 471-473, it appears that VIA
first obtained general liability insurance in 1975 from USF&G. USF&G remained VIA’s
liability insurer for six years, after which coverage was obtained from a variety of other
insurers, including appellee INA, which provided the coverage for three years. We are told
that all of the insurance carriers other than USF&G have settled with VIA.
Terms of the USF&G policy.3 The USF&G policy provided coverage for bodily
injury or property damage as follows:
The Company will pay on behalf of the Insured all sums which the Insured
shall become legally obligated to pay as damages because of
A. bodily injury or
B. property damage
to which this insurance applies, caused by an occurrence, and 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, false or fraudulent . . . .
II Aplt. App. at 476 (emphasis added). The policy defines “property damage” as
(1) physical injury to or destruction of tangible property which occurs during
the policy period, including the loss of use thereof at any time resulting
therefrom, or (2) loss of use of tangible property which has not been
physically injured or destroyed provided such loss of use is caused by an
occurrence during the policy period.
3
Because the parties refer us to only one policy, we presume that either the policy
originally issued in 1975 was renewed on the same terms in the five subsequent years or
that any subsequently issued policies contained the same material terms.
7
Id. The policy defines “occurrence” as “an accident, including continuous or repeated
exposure to conditions, which results in bodily injury or property damage neither expected
nor intended from the standpoint of the Insured.” Id.
The USF&G policy provided coverage for “personal injury” liability in addition to the
coverage for “bodily injury” and property damage. The personal injury liability coverage
similarly extended to sums the insured should become “legally obligated to pay as damages.”
The personal injury coverage was not limited to “occurrences,” but was limited to “offenses”
committed in the conduct of the insured’s business. Three groups of offenses are set out in
the policy. Of these, VIA argues that it is entitled to coverage under “Group B,” which
covers libel or slander, and “Group C,” which consists of “wrongful entry or eviction, or
other invasion of the right of private occupancy . . . .” Id. at 477.
The property damage liability coverage was limited by Exclusion (k), which provides,
inter alia, that the insurance does not apply to claims of damage to “property in the care,
custody or control of the insured or as to which the insured is for any purpose exercising
physical control.” Aplt. Supp. App. at 686. The property damage liability coverage was also
limited by Exclusion (m), which provides, inter alia, that the insurance does not apply “to
loss of use of tangible property which has not been physically injured or destroyed resulting
from . . . a delay in or lack of performance by or on behalf of the Named Insured of any
contract or agreement.” Id.
8
II
The district court’s judgment.
After a five-day bench trial of this federal insurance controversy, the district court
issued unpublished findings of fact and conclusions of law. II Aplt. App. at 470, et seq. The
judge held that the landowners had stated claims against VIA potentially within the coverage
for both personal injury and property damage liability. He found that the Yates plaintiffs'
allegations regarding the imposition of liens on their properties and the foreclosure
proceedings which had been brought by VIA stated a claim for personal injury liability
because the allegedly wrongful enforcement of liens and wrongful foreclosures could
constitute an “invasion of the right of private occupancy.”
The federal district judge found that the allegations regarding the cattle grazing lease
and the trespasses and overgrazing which allegedly resulted were averments of property
damage potentially within the coverage of the policies. He also found that these allegations
potentially stated a claim for personal injury within the coverage, citing the policy language
covering “wrongful entry or eviction, or other invasion of the right of private occupancy.”
The district court held that other allegations in the state court action also triggered the duty
to defend, but we need not concern ourselves with those other points in this opinion for
reasons we will explain.
The judge found that USF&G had waived all defenses not specifically set out in its
letters to the insured. He found that Exclusion (k) did not apply. The written findings and
9
conclusions addressed other arguments raised by USF&G based on specific policy language
and rejected them.
The court divided the defense obligation among all the insurers and determined
USF&G’s proportionate share to be 68.4%, based on the total limits of all of the USF&G
policies as a percentage of the total limits of all the policies. The total cost of defense of the
state court action which had been paid by INA up to the time of judgment in the instant case
was determined to be $1,661,271.46. Judgment was entered against USF&G and in favor
of INA for $1,136,309.60 based on USF&G's pro rata share (68.4%) of those defense costs.
Further, the court found that VIA was entitled to judgment against USF&G in the total
amount of $498,751.89. This total included $55,772 for defense costs in the state court
action which VIA had paid without reimbursement from the other insurers, plus prejudgment
interest on that amount of $62,594, and another $6,192 representing costs which VIA had
incurred in connection with the state court action but had not yet paid. The judgment in favor
of VIA also included $8,500 plus accrued interest of $3,171.50 for amounts paid by VIA to
settle with some of the landowners. The district judge further held that USF&G had acted
unreasonably within the meaning of a New Mexico statute on recovery of attorneys’ fees
from insurance companies, and included in the judgment in favor of VIA and against
USF&G some $301,000 in attorneys’ fees incurred in the instant case, plus accrued
prejudgment interest of some $60,800.
10
III
We review the district court’s findings of fact for clear error and its conclusions of law
de novo. The interpretation of the terms of the insurance policies, like other contracts, is a
question of law. However, when the trial court's interpretation is aided by extrinsic evidence
it cannot be set aside unless clearly erroneous. Cavic v. Pioneer Astro Industries, Inc., 825
F.2d 1421, 1424 (10th Cir. 1987).
A
We hold that the district court correctly concluded that the landowners’ allegations
regarding cattle grazing stated claims potentially within the coverage of the policies and so
triggered the duty to defend, and that the allegations did not clearly come within some
exclusion from coverage. In the pleading of the Yates plaintiffs demanding judgment against
Horizon and VIA, II Aplt. App. at 543, the landowners alleged that VIA, with others, entered
into a lease agreement which, inter alia, permitted Burris “to graze cattle in the Subdivisions
for five years”; the plaintiff landowners then alleged that “Burris grazed his cattle on the
Properties during and after this five year period.” Id. at 521 (emphasis added). In a lengthy
section of the complaint headed “Wrongful Conduct,” the landowners alleged that
22. The actions and conduct, and the failures to act, of . . .
VIA and certain of the directors and persons in control of . . . VIA, and the
authority granted to or reserved by . . . VIA in the Indentures, as alleged in this
complaint, have been and continue to be improper, unreasonable, arbitrary,
unlawful, illegal, oppressive, unconstitutional, in violation of fiduciary duties
and duties of trust and confidence, and constructively fraudulent, to the
detriment and damage of the plaintiffs and the class and their predecessors.
11
Id. at 531 (emphasis added). Furthermore the Yates complaint alleges that"[t]hese actions,
practices conduct, failures to act, and authority, of . . . VIA," id. at 531, and others consist,
inter alia, of the following: "[t]he permitting of improper use and waste of and trespass upon
the Properties by allowing the grazing and the over grazing of the Properties." Id. at 534
(emphasis added). The federal judge found that VIA notified USF&G on July 8, 1987, of
the Yates action and demanded defense by USF&G against the suit. Id. at 479. By letter
dated October 14, 1987, VIA was notified that USF&G refused to defend and denied
coverage for the Yates action under its policies. Id. at 479.
In USF&G's first response to VIA’s notice of the landowners’ claims, Suellen Berry
wrote: “It is unclear to us as to where you feel there is coverage under our policy for . . . any
. . . allegations in the suit.” Id. at 552. VIA, through its attorneys, wrote back listing several
specific paragraphs of the landowners’ complaint which it contended stated claims
potentially within the coverage. In her reply to this letter, which was the final
communication from USF&G to its insured so far as we are informed, Ms. Berry referred
to all of the specific paragraphs which VIA had identified, save one, and asserted that there
was no “fortuitous event which would constitute either bodily injury or property damage.”
Id. at 554. Focusing specifically on the paragraph of the landowners’ complaint which
contains the allegations, referred to above, that permitting the grazing was “wrongful
conduct,” Ms. Berry asserted that if this paragraph were construed as alleging property
damage, coverage would nevertheless be excluded under Exclusion (k). At trial, she testified
12
that she “assumed” that the insured either owned or had control of “the Properties” in order
to be able to enter into the Burris lease. INA Supp. App. at 3.
We believe that USF&G’s refusal to defend its insured against these allegations
cannot be justified by Exclusion (k). Arguably there is some ambiguity in the landowners’
allegations. The lease to Burris is alleged to have covered “the Subdivisions,” while the
grazing is alleged to have injured “the Properties.” The landowners had defined these terms
in their complaint. “Subdivisions” referred to the entirety of the two subdivisions; “the
Properties” referred to the lots owned by the landowners. II Aplt. App. at 517-18. The key
question relevant to the potential coverage is whether the landowners’ lots were clearly
alleged to have been in the custody or control of VIA so that coverage would definitely be
foreclosed by Exclusion (k). Such a high level of clarity is demanded in a coverage
exclusion under New Mexico law because the liability insurer is "obligated to defend when
the complaint filed by the claimant alleges facts potentially within the coverage of the
policy." Western Heritage Ins. Co. v. Chava Trucking Co., 991 F.2d 651, 656 (10th Cir.
1993) (citing State Farm Fire & Cas. Co. v. Price, 684 P.2d 524, 528, cert. denied, 683 P.2d
44 (N.M. 1984), overruled on other grounds, Ellingwood v. N.N. Investors Life Ins. Co., 805
P.2d 70 (N.M. 1991)).
It is immaterial that relief of a type not covered by the policy may also be sought
against the insured, or that relief for alleged acts not covered by the policy may also be
sought, as long as the claimant has “pleaded any grounds against the insured coming within
13
the terms of the policy.” American Employers’ Insurance Co. v. Contintental Cas. Co., 512
P.2d 674, 677 (N.M. 1973); Chava Trucking Co., 991 F.2d at 656 ("Although certain claims
in the underlying state court action may have been outside the policy, other claims clearly
were within the scope of the policy."). The insurer is required to resolve ambiguities in favor
of potential coverage. Price, 684 P.2d at 528. In New Mexico, as in most jurisdictions, the
duty to defend is broader than the duty to indemnify. Id.
We hold that under these standards, USF&G’s refusal to defend was unjustified.
Although USF&G’s inference that VIA had exercised control over the landowners’ lots,
triggering Exclusion (k), might be reasonable, it certainly is not the only reasonable inference
to be drawn from the broadly-worded pleading. It could also be reasonably inferred that the
grazing and overgrazing allegedly allowed by VIA and Horizon damaged the landowners'
properties that were held in the landowners' own custody or control, and that damage from
cattle coming onto their properties, permitted by acts of VIA and Horizon, resulted in damage
chargeable to VIA.4
4
The evidence showed that the developer, Horizon, had retained title to large
blocks of land within the subdivision, which had never been platted or sold. VIA Supp.
App. at 331-32, 339-42. A reasonably prudent person would have realized that this state
of affairs was a possibility in a development of this size. Horizon was identified in the
landowners’ pleadings as a lessor on the Burris lease, along with VIA. Furthermore, VIA
had title to portions of the subdivisions which were intended to be dedicated to common
purposes, such as parks and schools. II Aplt. App. at 561. The Burris lease covered only
property owned by Horizon or VIA, not lots owned by the individual landowners. VIA
Supp. App. at 376-78. Nevertheless the inference that VIA and Horizon were being
charged with causing or permitting the grazing damage to the landowners' properties was
reasonable and supports the holding that coverage existed.
14
USF&G’s duty to defend is to be determined by the allegations of the complaint
against its insured and the facts actually known to USF&G at the time of demand. American
General Fire & Casualty Co. v. Progressive Casualty Co., 799 P.2d 1113, 1116 (N.M. 1990).
We think that the landowners’ pleadings, although ambiguous, could have been construed
as stating a claim for property damage potentially within the coverage of the policy, not
excluded by Exclusion (k). USF&G failed to construe the landowners’ allegations in favor
of such potential coverage. This is a breach of duty under New Mexico law. Instead of
construing the allegations as not within the coverage, as USF&G apparently did,
[t]he insurer must also fulfill its promise to defend even though the complaint
fails to state facts with sufficient clarity so that it may be determined from its
face whether or not the action is within the coverage of the policy, provided
the alleged facts tend to show an occurrence within the coverage.
Foundation Reserve Insurance Co. v. Mullenix, 642 P.2d 604, 605 (N.M. 1982) (quoting
American Employers’ Ins. Co. v. Continental Cas. Co., 512 P.2d 674, 676 (N.M. 1973)). We
therefore reject USF&G's claim of error in the trial judge's ruling that coverage was provided
under the property damage provision because of the grazing and overgrazing allegations.
B
Contrary to USF&G's position, the district court held that the landowners’ allegations
set forth several claims potentially within the policy’s coverage for personal injury. First, the
judge found that the averments regarding the trespass of cattle, grazing and overgrazing on
the landowners’ properties, triggered coverage under both the "personal injury" as well as
the property damage coverages. II Aplt. App. at 484, ¶ 60. We agree that these allegations
15
stated a claim potentially within the coverage for personal injury due to wrongful entry on
the property of another under the “offenses” described in Group C of the policy. Group C
covers these offenses: “wrongful entry or eviction, or other invasion of the right of private
occupancy . . . .” Id. at 477.
USF&G argues that the policy language requires the offense of trespass or wrongful
entry to have been committed by VIA itself. The policy does not unambiguously say so,
however. Instead, the policy covers damages which the insured shall become obligated to
pay because of injury “arising out of one or more of the following offenses committed in the
conduct of [VIA’s] business . . . .” Id. New Mexico follows the rule that any ambiguities
in the language of an insurance policy are to be construed against the insurer, and a clause
is ambiguous if it is “reasonably and fairly susceptible of different constructions.” Knowles
v. United Services Auto Ass’n, 832 P.2d 394, 396 (N.M. 1992). We conclude that the
language involved here is fairly susceptible of the construction that coverage would exist in
circumstances in which the insured was only indirectly responsible for the trespass. We hold
that USF&G was obligated to defend based on the trespass allegations and the Group C
personal injury coverage, and reject USF&G's claim of error in the trial judge's holding
against USF&G thereon.
We also agree with the district court’s conclusion that the allegations of wrongful
foreclosures stated a claim potentially within the coverage of the policy for personal injury,
also under Group C “offenses,” specifically for “invasion of the right of private occupancy.”
16
As the district court correctly noted, the coverage for personal injury liability is not limited
to “occurrences” and so no “accident” needs to have been alleged by the landowners.
USF&G attacks the district court’s conclusion that the landowners’ pleadings stated
a claim potentially within this part of the coverage by pointing out that, as the facts turned
out, no foreclosures, wrongful or otherwise, occurred during the years that USF&G’s policies
were in force. This argument is in direct and irreconcilable conflict with USF&G’s position,
with which we agree, that the duty to defend is to be determined based only on the allegations
made against its insured and the terms of its policies. Extrinsic evidence which tends to show
that a claim is not actually within the coverage will not absolve the insurer of its duty to
defend against allegations which are potentially within the coverage. Mullenix, 642 P.2d
604.
In addition, we believe that the landowners’ allegations stated a claim potentially
within the policy’s coverage for personal injury under the Group B offenses, which in
pertinent part includes “the publication or utterance of a libel or slander or of other
defamatory or disparaging material . . . .” We believe that this language would cover claims
of slander of title, and USF&G does not contend otherwise. The district judge found that
landowners who failed to pay the assessments as required by the indentures “held their
Subdivided Lots subject to an assessment charge and a lien in favor of VIA.” II Aplt. App.
at 485. The landowners alleged that the indentures filed against their properties were
wrongful. As we noted previously, the landowners alleged that the assessments were
17
“discriminatory, oppressive, unfair, arbitrary, and unreasonable.” Id. at 524. These
allegations, even though they do not expressly state a claim for slander of title, must be read
as potentially stating a claim within such coverage.5
In sum, we hold that USF&G had a duty to defend on the ground of potential coverage
stated by the Yates action allegations under the policy provisions as follows: there were
allegations which could be reasonably construed as within the property damage coverage by
the averments of grazing and overgrazing allegedly allowed by VIA and Horizon, causing
damage to the Yates landowners' properties, chargeable to VIA; there were also landowners'
allegations that could reasonably be construed as within the policy's coverage for personal
injury due to the trespass allegations of "offenses" under Group C of the policy covering
"wrongful entry or eviction, or other invasion of the right of private occupancy"; there were
landowner allegations, also potentially within policy coverage, for personal injury under
Group B offenses that include "publication or utterance of a libel or slander or other
defamatory or disparaging material."
Having determined that USF&G had a duty to defend VIA on at least these bases --
property damage and personal injury claims -- we need not resolve many of the issues raised
5
We focus here, as we have throughout this opinion, on the landowners’ original
pleading. USF&G argues that the landowners did not specifically plead the tort of
slander of title until their third amended complaint. We conclude that what had been
pleaded in the original complaint was sufficient, however, and so do not rely on the third
amended complaint of the landowners in our analysis.
18
by the parties regarding whether other allegations stated claims potentially within the
coverage or whether other defenses to coverage have been shown by USF&G.
C
As a threshold matter prior to considering other arguments made by USF&G, we note
that USF&G’s letter to the insured by which it denied coverage and declined to provide a
defense stated only two grounds for USF&G’s decision: that there was no bodily injury or
property damage alleged as defined by the policies, and that, if the cattle grazing allegations
were construed as allegations of property damage, coverage was nevertheless excluded under
Exclusion (k). The threshold issue is whether USF&G has waived defenses not asserted in
this communication with its insured.
Under New Mexico law, the insurer has waived defenses not relied on in its formal
denial of coverage if, but only if, the insured makes a showing of “detriment or prejudice.”
Larson v. Occidental Fire & Casualty Co., 446 P.2d 210, 212 (N.M. 1968), overruled on
other grounds, Estep v. State Farm Mutual Auto. Ins. Co., 703 P.2d 882 (N.M. 1985).
Unfortunately, we have found no guidance in the cases after Larson as to what kind of
showing of detriment or prejudice by the insured will suffice. VIA relies on cases from
Missouri which have held that being forced to sue for a declaration of coverage is sufficient
prejudice. See, e.g., Stone v. Waters, 483 S.W.2d 639, 645 (Mo. Ct. App. 1972). But see
Brown v. State Farm Mutual Auto. Ins. Co., 776 S.W. 2d 384, 387-89 (Mo. 1989) (en banc)
(limiting Stone v. Waters). On the other hand, USF&G argues that litigation would have
19
been necessary in any event to test the defenses raised in the denial letter; thus, USF&G
urges that it is illogical to contend that VIA suffered prejudice from the mere failure to
include all defenses in the denial letter.
With little guidance from the New Mexico courts as to what would constitute
prejudice as required by Larson, we are reluctant to decide this issue unless absolutely
necessary. We find it is not necessary. Instead, we will assume without deciding that
USF&G did not waive any additional defenses. We conclude that the district court’s
determination that USF&G breached its duty to defend was correct, notwithstanding the
additional defenses raised.
D
USF&G argues that it was not obligated to defend VIA in the state court action
because the landowners sought no damages, only equitable relief. We find no merit in this
argument. It is true, as USF&G contends, that the landowners sought several equitable
remedies. Nevertheless, it is clear that the landowners’ pleading sought damages for injuries
to their properties from the cattle grazing. USF&G’s arguments to avoid this simple and
readily apparent fact are to no avail. USF&G argues that the allegations about cattle grazing
could not really have been meant to support a claim for damages but were merely included
as instances of VIA’s breaches of its duties to the landowners. This is so, USF&G contends,
because any claim for damages would have been barred by limitations and by failure to
comply with a New Mexico statute which precludes recovery for damage caused by
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trespassing livestock unless the plaintiff has fenced his property. N.M. Stat. Ann. § 77-16-3
(Michie Supp. 1993).
As VIA and INA correctly point out, it completely misses the mark to say that the
claims against the insured were doomed to failure because of the existence of valid defenses.
Under the terms of the policies, it was clearly USF&G’s duty to resist the claims and to raise
these defenses to them on behalf of its insured. USF&G promised to defend actions even if
groundless, false, or fraudulent. The contention that USF&G was not bound to defend an
action in which the statute of limitations or some other defense could have been raised with
some likelihood of success conflicts directly with USF&G’s binding agreement.
E
USF&G also argues that VIA is collaterally estopped from arguing that the
landowners claimed damages because of prior rulings by two courts which, USF&G
contends, determined the issue adversely to VIA. In its brief-in-chief, USF&G failed to show
that this issue was raised below, and we need not consider it. 10th Cir. R. 28.2(b). Parties
should not ignore the fundamental requirement of showing that the issues they bring before
this court were properly raised below. Fulfilling this requirement by moving to supplement
the appendix after the adversary has brought the dereliction to the attention of the court is
unsatisfactory to say the least.
In any event, we are not persuaded that the judgment below should be reversed on this
basis. USF&G’s first argument for collateral estoppel or issue preclusion is based on
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developments in the state court action. VIA had filed a third-party complaint for contribution
and indemnity against Horizon and took an interlocutory appeal from the district court’s
dismissal of that claim. In affirming the trial court’s dismissal of the third-party complaint,
the Supreme Court of New Mexico took note of the fact that much of the relief which the
landowners sought against VIA in the primary action was equitable in nature. Yates
Exploration, 773 P.2d at 354.
We first note that this issue concerns only the third-party complaint by VIA against
Horizon, mentioned above. As far as the record developed by USF&G shows, VIA may
simply have not alleged in that third-party complaint that Horizon was obligated to indemnify
it for any damages that might be awarded to the landowners on those allegations. As the
party claiming the benefit of the doctrine of issue preclusion, USF&G had the burden of
establishing all facts necessary for its application.
Perhaps more importantly, a final judgment is required before applying issue
preclusion. C & H Construction & Paving Co. v. Citizens Bank, 597 P.2d 1190, 1200-01
(N.M. 1979). The orders relied on by USF&G have not become final, as far as our record
shows. Federal courts are directed to give the judgments of a state court the same effect that
the courts of that state accord to its judgments. 28 U.S.C. § 1738; Dixon v. Richer, 922 F.2d
1456, 1459 (10th Cir. 1991). New Mexico would not give preclusive effect to the ruling on
which USF&G relies because the proceedings in the state court have not culminated in a final
22
judgment. Consequently, we will not give preclusive effect to such an interlocutory ruling
either.
USF&G also contends that collateral estoppel prevents VIA from contesting the
application of Exclusion (k), based on an order entered by Judge Campos in litigation
between VIA and another insurer, Atlanta International Insurance Company (before the
several declaratory judgment actions were consolidated, apparently). Of course, federal law
controls the preclusive effect of the decisions of federal courts, and federal law requires a
final judgment before applying issue preclusion, just as New Mexico does. See, e.g.,
Affiliated Ute Citizens v. Ute Indian Tribe, 22 F.3d 254, 256 (10th Cir. 1994). USF&G’s
argument again fails for lack of a final judgment to support issue preclusion.
Accordingly, we conclude that the district court correctly declined to apply the
doctrine of issue preclusion or collateral estoppel and properly permitted VIA to demonstrate
that the landowners’ complaint sought an award of damages for injury to property, among
the other remedies sought.
F
USF&G also argues that the cattle grazing allegations do not give rise to the duty to
defend because there is no allegation of an “occurrence” as required by the policies. USF&G
contends that the allegations are only that VIA entered into a cattle grazing lease, which
clearly was intentional. Such acts cannot be accidents, it urges, and so cannot constitute
occurrences within the meaning of the policy language. This argument is built upon a false
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premise. The policy language does not limit coverage to incidents in which the accident
results from the direct act of the insured, as USF&G’s argument assumes. Although the
landowners’ pleadings do not allege an accident, neither do they clearly indicate that the
overgrazing was not the result of an accident. The claims were potentially within the
coverage for property damage liability and should have been defended by USF&G.
IV
A
The district court found that “USF&G acted