No. 12113
I N T E SUPREME C U T O THE STATE O MONTANA
H OR F F
1972
ALLEN L McALEAR,
.
P l a i n t i f f and Respondent,
SAINT PAUL INSURANCE COMPANIES,
a Corporation,
Defendant and Appellant.
D i s t r i c t Court of t h e Fourteenth J u d i c i a l D i s t r i c t ,
Appeal from:
Honorable N t A l l e n , Judge p r e s i d i n g
a .
Counsel o f Record :
For Appellant :
P a t r i c k F Hooks argued, Townsend, Montana.
w
Glenn F Kenney appeared, Helena, Montana.
w
For Respondent:
A l l e n L. McAlear argued, Bozeman, Montana.
Submitted: January 12, 1972
Decided: JPN 3 11972
Filed : 1]fi~q 3 7
*
. 1972
Mr. 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 colli-
sion 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 statement of fact which
included the pleadings, stipulated exhibits, and discovery pro-
ceedings. On November 14, 1969, plaintiff Allen F. McAlear, a
Bozeman attorney, purchased a professional liability policy from
defendant, Saint Paul Insurance Companies, containing the follow-
ing insuring agreement and exclusions:
"Insuring Agreements
"Coverage A - Professional Liability
"To pay 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 In-
sured's capacity as a lawyer and caused by the
Insured or any other person for whose acts the
Insured is legally liable (the performance of
professional services shall be deemed to in-
clude 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 attorney-
client relationship the Insured would be
legally responsible as attorney for a fiduciary)
and t h e Company s h a l l have t h e r i g h t and d u t y
t o d e f e n d i n h i s name and b e h a l f any s u i t
a g a i n s t t h e I n s u r e d a l l e g i n g damages, even i f
such s u i t i s g r o u n d l e s s , f a l s e o r f r a u d u l e n t ;
b u t t h e Company s h a l l have t h e r i g h t t o make
such i n v e s t i g a t i o n and n e g o t i a t i o n o f any claim
o r s u i t a s may be deemed e x p e d i e n t by t h e Com-
pany. The Company, however, s h a l l n o t make
s e t t l e m e n t or compromise any claim or s u i t
without t h e w r i t t e n consent of t h e Insured."
The " E x c l u s i o n s " s e c t i o n of t h e p o l i c y s p e c i f i c a l l y
provides :
"Coverage A d o e s n o t a p p l y :
" ( 3 ) t o b o d i l y i n j u r y t o , or s i c k n e s s , d i s e a s e
or d e a t h o f any p e r s o n , o r t o i n j u r y t o o r
d e s t r u c t i o n of any t a n g i b l e p r o p e r t y , i n c l u d -
i n g t h e l o s s of u s e t h e r e o f . "
During t h e p o l i c y p e r i o d McAlear f l e w t o S a l t Lake C i t y
w i t h a c l i e n t , Robert S. Beck. Beck had c o n t a c t e d McAlear re-
g a r d i n g t h e p u r c h a s e o f a t r a i l e r and it was n e c e s s a r y f o r them
t o go t o S a l t Lake C i t y t o o b t a i n f i n a n c i n g from a p r i v a t e i n d i -
vidual. A s t h e sellers w e r e i n s o l v e n t it w a s n e c e s s a r y t o com-
p l e t e t h e t r a n s a c t i o n and g e t t h e t i t l e r e c o r d e d b e f o r e l i e n s
could be recorded a g a i n s t t h e s e l l e r ' s e q u i t y i n t h e trailer.
Beck and McAlear had flown t o S a l t Lake C i t y on March 20,
1969, i n McAlear's p l a n e f o r t h i s purpose. They t r a n s a c t e d t h e i r
b u s i n e s s on March 2 1 and 2 2 . A t a b o u t 6:00 a.m. on March 2 3 ,
w h i l e p r e p a r i n g t o r e t u r n t o Bozeman, McALear was engaged i n a
p r e f l i g h t inspection of h i s plane. H e manually t u r n e d o v e r t h e
p r o p e l l o r w h i l e t h e i g n i t i o n was i n t h e "on" p o s i t i o n . This
caused t h e p i l o t l e s s a i r p l a n e t o a c c e l e r a t e down t h e ramp and
crash i n t o three 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 a-
gainst McAlear for his alleged negligence and sought recovery
of repair costs, depreciation and loss of use of Burchett's air-
plane.
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 cover-
age 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 judg-
ment 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, provid-
in material part:
"IT IS HEREBY ORDERED, ADJUDGED AND DECREED,
that the Plaintiff recover for his cost of
defense in the suit brought against him.
"It appears to the Court that the policy was
carelessly written, and since this is the
fault of the insurance company, they should
pay for their own carelessness, because cer-
tainly the duty to defend is not limited to
the liability of the policy."
Following d e n i a l of i n s u r e r ' s motion t h a t t h e c o u r t
e n t e r w r i t t e n f i n d i n g s of f a c t and c o n c l u s i o n s s f l a w , t h e
insurer appeals,
The t h r u s t of i n s u r e r ' s p o s i t i o n i n t h e i n s t a n t case
i s t h a t i t s d u t y t o d e f e n d i s l i m i t e d t o claims a g a i n s t t h e
insured w i t h i n t h e coverage of t h e p o l i c y . The i n s u r e r con-
t e n d s t h a t where, a s h e r e , t h e r e i s no p r i m a r y i n d e m n i t y c o v e r -
a g e f o r t h e B u r c h e t t a c c i d e n t , it h a s no d u t y t o d e f e n d . Insurer
p o i n t s o u t t h a t t h e b a s i c i n s u r i n g agreement i n t h e p o l i c y (Cover-
a g e A ) , p r o p e r l y c o n s t r u e d , s o l i m i t s t h e d u t y t o d e f e n d and
t h a t t h e p o l i c y c o n t a i n s a n e x p r e s s e x c l u s i o n of p r o p e r t y dam-
a g e claims ( E x c l u s i o n 3 ) .
On t h e o t h e r hand, t h e g i s t of t h e i n s u r e d ' s p o s i t i o n
i s t h a t t h e d u t y t o d e f e n d i s c o n t r a c t u a l and where, as h e r e , t h e
d u t y t o d e f e n d i s u n r e s t r i c t e d by t h e terms of t h e p o l i c y , t h e
duty t o defend is n o t l i m i t e d t o t h e primary indemnity coverage
of t h e policy. According t o t h e i n s u r e d , t h e d u t y t o d e f e n d
i n t h e i n s t a n t c a s e i s e n t i r e l y i n d e p e n d e n t of t h e p r i m a r y i n -
demnity c o v e r a g e o f t h e p o l i c y . Thus, t h e i n s u r e d a r g u e s , where
t h e B u r c h e t t c o m p l a i n t f a l l s w i t h i n t h e s c o p e of t h e " d u t y t o
defend" provision i n t h e p o l i c y , t h e i n s u r e r i s o b l i g a t e d t o
defend without regard t o t h e primary indemnity coverage a f f o r d -
ed by t h e p o l i c y . A s a c o r o l l a r y t o t h i s argument, t h e i n s u r e d
i n s i s t s t h a t t h e e x c l u s i o n o f p r o p e r t y damage c l a i m s from t h e
primary indemnity c o v e r a g e a f f o r d e d by t h e p o l i c y i n no way
l i m i t s t h e duty of t h e i n s u r e r t o defend.
O r d i n a r i l y a l i a b i l i t y i n s u r e r has no d u t y t o d e f e n d
an a c t i o n a g a i n s t t h e i n s u r e d when t h e c l a i m o r c o m p l a i n t d o e s
n o t f a l l w i t h i n t h e c o v e r a g e of t h e l i a b i l i t y p o l i c y . I f the
i n s u r e r would have no o b l i g a t i o n t o indemnify t h e i n s u r e d s h o u l d
t h e c o m p l a i n a n t r e c o v e r , t h e n t h e r e i s no c o n t r a c t u r a l o b l i g a -
t i o n t o afford a defense. This general r u l e i s s u c c i n c t l y s t a t e d
i n 50 ALR2d a t page 472, a s f o l l o w s :
" * * * a l i a b i l i t y i n s u r a n c e company h a s
no d u t y t o defend a s u i t b r o u g h t by a t h i r d
p a r t y a g a i n s t t h e i n s u r e d where t h e p e t i t i o n
o r c o m p l a i n t i n s u c h s u i t upon i t s f a c e a l -
l e g e s a s t a t e of f a c t s which f a i l s t o b r i n g t h e
case w i t h i n t h e c o v e r a g e o f t h e p o l i c y . Con-
s e q u e n t l y t h e company i s n o t r e q u i r e d t o d e -
f e n d i f it would n o t be bound t o indemnify
t h e i n s u r e d even though t h e c l a i m a g a i n s t him
should p r e v a i l i n t h a t action."
To l i k e e f f e c t see 49 ALR2d 703; 1 1 4 U . o f Pa. Law Review.734,
"The I n s u r e r ' s Duty t o Defend Under a L i a b i l i t y I n s u r a n c e P o l i c y "
pp. 747-749, 757; 7A Appleman I n s . L. & P., S 4685, pp. 462, 471.
The a l l e g a t i o n s i n t h e c o m p l a i n t a g a i n s t t h e i n s u r e d
d e t e r m i n e whether t h e r e i s c o v e r a g e under t h e p o l i c y . T h i s gen-
e r a l r u l e i s w e l l s t a t e d i n 4 4 AmJur 23, I n s u r a n c e , s 1539;
"Upon t h e b a s i s o f t h e a l l e g a t i o n s of t h e
c o m p l a i n t o r p e t i t i o n , t h e c o u r t s have a d o p t e d
t h e following tests f o r determining whether
particular allegations require the insurer t o
defend t h e a c t i o n brought a g a i n s t t h e insured:
i f t h e complaint i n t h e a c t i o n brought a g a i n s t
t h e i n s u r e d upon i t s f a c e a l l e g e s f a c t s which
come w i t h i n t h e c o v e r a g e of t h e l i a b i l i t y p o l i c y ,
t h e i n s u r e r i s o b l i g a t e d t o assume t h e d e f e n s e
of t h e a c t i o n ; b u t i f t h e a l l e g e d f a c t s f a i l
t o bring t h e case within t h e p o l i c y coverage,
t h e i n s u r e r i s f r e e of such o b l i g a t i o n , a t
least i n i t i a l l y . Stated d i f f e r e n t l y , t h e
i n s u r e r i s u n d e r an o b l i g a t i o n t o d e f e n d o n l y
i f it c o u l d b e h e l d bound t o indemnify t h e
i n s u r e d , assuming t h a t t h e i n j u r e d p e r s o n proved
t h e a l l e g a t i o n s of t h e c o m p l a i n t , r e g a r d l e s s
of t h e a c t u a l outcome of t h e case. * * * "
Measuring t h e B u r c h e t t c l a i m a g a i n s t t h e p o l i c y pro-
v i s i o n s h e r e , i t i s clear t h a t B u r c h e t t ' s a c t i o n i s a p r o p e r t y
damage c l a i m s e e k i n g money damages f o r M c A l e a r ' s a l l e g e d neg-
l i g e n c e i n damaging B u r c h e t t ' s p l a n e , d e p r e c i a t i o n i n i t s v a l u e ,
and l o s s o f i t s u s e . The p o l i c y e x p r e s s l y e x c l u d e s from cover-
a g e " i n j u r y t o o r d e s t r u c t i o n of any t a n g i b l e p r o p e r t y , i n c l u d -
i n g t h e l o s s of use thereof". Under such c i r c u m s t a n c e s t h e r e i s
no d u t y t o defend, a s h a s been w e l l e x p r e s s e d by t h e Michigan
Supreme C o u r t i n Duval v . Aetna C a s u a l t y & Surety Co., 3 0 4 Mich.
"The i n s u r e r i s n o t r e q u i r e d t o d e f e n d t h e
i n s u r e d a g a i n s t claims e x p r e s s l y excluded
from coverage i n t h e p o l i c y , The e x c e p t i o n
i n t h e p o l i c y i s a p a r t o f t h e c o n t r a c t be-
tween t h e p a r t i e s . The d u t y o f t h e i n s u r a n c e
company t o defend was n o t i n d e p e n d e n t o f t h e
d u t y t o pay damages, i f any, The two p r o v i s i o n s
a r e not separable."
However, McAlear c o n t e n d s t h a t t h e "duty t o d e f e n d " pro-
v i s i o n of h i s p o l i c y i s u n i q u e , t h e r e b y t a k i n g h i s case o u t s i d e
t h e s c o p e of t h e g e n e r a l r u l e . He points out t h a t the basic in-
s u r i n g agreement, Coverage A , p r o v i d e s i n material p a r t " t h e
company s h a l l have t h e * * * duty t o defend * * * any s u i t a g a i n s t
t h e I n s u r e d a l l e g i n g damages, even i f s u c h s u i t i s g r o u n d l e s s ,
false o r fraudulent", H e f u r t h e r c o n t e n d s t h i s p r o v i s i o n con-
s t i t u t e s a n u n r e s t r i c t e d c o n t r a c t u a l o b l i g a t i o n on t h e p a r t of
t h e i n s u r e r t o d e f e n d w i t h o u t r e g a r d t o t h e primary indemnity
coverage a f f o r d e d by t h e p o l i c y . M c A l e a r c o n t e n d s t h a t because
such language n e i t h e r r e f e r s t o n o r r e s t r i c t s t h e d u t y t o d e f e n d
t o damage a c t i o n s w i t h i n t h e coverage o f t h e p o l i c y , any s u i t f o r
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 (not purchased
by the insured in the instant case) the duty to defend is re-
stricted 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 in-
jury 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 meaning
which t h e p a r t i e s e x p e c t e d from them, t h e y
have a l s o a p p l i e d t h e d o c t r i n e of t h e a d h e s i o n
c o n t r a c t t o knsurance p o l i c i e s , h o l d i n g t h a t
i n view of t h e d i s p a r a t e b a r g a i n i n g s t a t u s of
t h e p a r t i e s w e must a s c e r t a i n t h a t meaning o f
t h e c o n t r a c t which t h e i n s u r e d would reason-
a b l y e x p e c t . " (EmpHasis added. )
The Montana Supreme C o u r t h a s p r e v i o u s l y r e c o g n i z e d t h i s same
t e s t i n t h e f o l l o w i n g language from S t . P a u l F i r e & Marine I n s .
Co. v. Thompson, 150 Mont. 1 8 2 , 187, 433 P.2d 795:
"Again l o o k i n g t o t h e Kansas r u l e which w e
have a d o p t e d , w e f i n d t h a t , ' t h e t e s t i s n o t
what t h e i n s u r e r i n t e n d e d t h e words of t h e
p o l i c y t o mean b u t what a r e a s o n a b l e p e r s o n
i n t h e p o s i t i o n of an i n s u r e d would u n d e r s t a n d
them t o mean. ' "
Applying t h i s t e s t t o t h e i n s t a n t c a s e , would a reason-
a b l e lawyer e x p e c t t h a t h i s p r o f e s s i o n a l l i a b i l i t y p o l i c y o b l i -
g a t e d h i s i n s u r e r t o defend him a g a i n s t damage s u i t s e x p r e s s l y
excluded from t h e primary indemnity coverage of t h e p o l i c y ? Or
p u t a n o t h e r way, would a r e a s o n a b l e lawyer u n d e r s t a n d t h a t h i s
p r o f e s s i o n a l l i a b i l i t y p o l i c y obligated h i s i n s u r e r t o defend
him a g a i n s t a l l damage s u i t s of whatever n a t u r e ? W e hold t h a t a
r e a s o n a b l e lawyer would no more u n d e r s t a n d t h a t h i s p r o f e s s i o n a l
m a l p r a c t i c e p o l i c y o b l i g a t e d h i s i n s u r e r t o defend him a g a i n s t
damage c l a i m s a r i s i n g o u t of an a i r p l a n e a c c i d e n t t h a n a g a i n s t
damages a r i s i n g o u t o f a n a s s a u l t , an automobile a c c i d e n t , o r a
f a l l on t h e s t e p s o f h i s r e s i d e n c e .
Both McAlear and t h e d i s t r i c t c o u r t r e l y h e a v i l y upon
t h e h o l d i n g of t h i s C o u r t i n Thompson f o r t h e p r o p o s i t i o n t h a t
t h e d u t y t o defend i s b r o a d e r t h a n t h e primary indemnity coverage
under an i n s u r a n c e p o l i c y . There w e s a i d a t p. 188,
"'"The principle that 'the duty 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
shall become 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 ordinary meaning.'
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
it was 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 is
no 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